California Supreme Court Holds Contractual Limitation Of Liability Provisions Cannot Limit Damages For Willful Injury

On April 24, the California Supreme Court issued an opinion clarifying a crucial unresolved issue of California law: To what extent, if any, can a limitation of liability provision in a contract limit damages for willful injury? Previously, different California courts had apparently answered that question in different ways. Now, the Supreme Court has adopted a "categorical rule": parties may not contract away liability for willful injury. The case has important implications for any party contracting under California law. The decision is New England Country Foods, LLC v. VanLaw Food Products, Inc.; a copy may be found here.

Background

The plaintiff in the case, New England Country Foods (NECF), sold barbeque sauce to Trader Joe's, which in turn sold it to the public. After initially manufacturing the product itself, NECF contracted with VanLaw Food Products, the defendant, whereby VanLaw agreed to manufacture NECF's barbeque sauce.

In language that will be familiar to any commercial litigator, the contract contained provisions broadly limiting the parties' potential damages. It stated that "[t]o the extent allowed by applicable law . . . 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." To emphasize the point, 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[.]"

Towards the end of the (three-year) contract, things went awry. According to the allegations in the complaint, VanLaw hatched a scheme to clone NECF's barbeque sauce and sell it directly to Trader Joe's. The complaint further alleged that, as a result, Trader Joe's ended its decades-long relationship with NECF.

NECF sued VanLaw in federal court, asserting five causes of action: breach of contract, intentional interference with contractual relations, intentional interference with prospective economic advantage, negligent interference with prospective economic relations, and breach of fiduciary duty. NECF sought $6 million in lost profits and punitive damages.

The district court granted VanLaw's motion to dismiss NECF's complaint based on the contract provisions limiting damages. The district court reasoned that the parties' contract barred all damages sought by NECF. In opposing the motion to dismiss, NECF argued that parties cannot limit liability for future intentional torts under Civil Code section 1668, which provides that "[a]ll contracts which have for their object, directly or indirectly, to exempt anyone from responsibility for . . . willful injury to the person or property of another . . . are against the policy of the law." The district court rejected this argument, reasoning that section 1668 "merely acts to prevent contracts that completely exempt parties from liability, not simply limit damages."

NECF appealed. Noting a clear split in California authority, the Ninth Circuit certified the following question to the California Supreme Court after argument:

Some California courts had reasoned yes and upheld such clauses. Others had reached the opposite conclusion and invalidated such limitation provisions. This "unresolved issue of state law," the Ninth Circuit explained in its order certifying the question, was "pivotal in this case and important for all parties who contract under California law."

The Supreme Court's Decision

The question certified by the Ninth Circuit to the California Supreme Court did not distinguish between NECF's claims based on whether they alleged intentional torts or not. However, according to the California Supreme Court, the differences in the causes of action were very important. The case "implicates section 1668's prohibition on release of liability for 'willful injury to the person or property of another'" precisely because of NECF's "three causes of action for independently tortious conduct." To answer the certified question, the Supreme Court assumed that NECF's three intentional tort causes of action "allege 'willful injury' under section 1668."

To answer that (reframed) question, the Supreme Court clarified that "no context-dependent analysis is required to determine a particular release of liability for 'willful injury' is barred by section 1668." It rejected a "case-by-case" approach advocated by VanLaw. According to the court, it did not matter that the parties were sophisticated private commercial entities that bargained for the clauses on an equal footing, and instead, releases for "willful injury" under any circumstances "'are against the policy of the law'" regardless. Thus, the Supreme Court announced a "categorical rule": "Parties may not contract away liability for willful injury."

Further, under this categorial rule, whether the limitation on liability was partial or total made no difference. The Legislature, the Supreme Court held, simply "did not intend to allow parties to privately negotiate how much they are willing to pay to inflict willful injury." Slip Op. at 9.

The Supreme Court rejected a restrictive view of the word "exempt" in the statute. According to it, reading section 1668 to "bar[] only full releases of liability" is too parsimonious. The phrase "exempt . . . from responsibility" in section 1668 did not mean "exempt from all possibleresponsibility," the court explained. Both text and context led to this result. Citing Merriam-Webster's definition, the court reasoned that "exempt" simply means released from "some liability or requirement to which others are subject." The language surrounding the word "exempt" in the statute suggested that section 1668 "should be read broadly" because it applies to "contracts which have for theirobject, directly or indirectly, to exempt anyone from responsibility."

The Supreme Court then explained that its reading of section 1668 also "effectuates its purpose of safeguarding our tort system." Although private parties have "wide latitude to form contracts, that latitude is bounded by . . . broader social policies" protected by tort law, and the tort system's "concern with vindicating social policy is at its zenith when it comes to willful wrongs." The Supreme Court also relied on case law from other jurisdictions holding that releases of liability for intentional wrongdoing were against public policy "without distinguishing between limits and full releases." It also side-stepped as "largely distinguishable" lower court case law in California suggesting that limitation on damages for intentional torts may be valid, and for good measure "disapprove[d] of them to the extent they suggest a limitation on damages for willful injury may be valid in some circumstances."

Key Takeaways

In light of the Supreme Court's decision, where exactly do things stand regarding the enforceability of limitation of liability provisions in California? While some clarity has been gained—and despite the categorical language used by the Supreme Court—some outstanding questions remain unresolved.

First, limitation on liability provisions applied to intentional wrongdoing—or, to use the Supreme Court's parlance and the statute's language—claims for "willful injury" are invalid as against public policy. This appears to be true regardless of case-specific facts regarding the sophistication or representation of the contracting parties. Additionally, it is irrelevant that any such provision "limits," as opposed to completely bars, damages. The precise wording of the limitations provision is also irrelevant. The statute, as applied to torts asserting "willful injury," says what it means and means what it says.

Curiously, however, the Supreme Court assumed but did not decide that the three intentional torts pled in the case constituted claims for "willful injury." It's unclear why the court dodged what appeared to be a rather obvious conclusion: that anyclaim asserting intentional wrongdoing almost by definition constitutes a claim for "willful injury" within the meaning of the statute. The notion that there is some delta or distinction between an intentional tort on the one hand and a claim for "willful injury" on the other, at least at first blush, looks like a distinction without a difference. But if that is the case, then why didn't the Supreme Court simply say so? The lower courts will need to fill in this rather puzzling blank in the Supreme Court's otherwise categorical analysis.

Second, section 1668 does not prevent parties from limiting their respective liability for breach of contract, subject to the usual tools of contractual analyses (e.g., unconscionability). This is so even if a plaintiff characterizes its breach of contract claim as "willful" or "intentional."

Central to the Supreme Court's analysis was the distinction between contract and tort law, and where the claims asserted are "nothing more than a breach of . . . contractual obligations section 1668 does not apply." To create an exception for supposedly "intentional" or "willful" breaches of contract, the Supreme Court explained, "would erode fundamental distinctions between contract law, which is meant to enforce promises of individual parties, and tort law, which is meant to vindicate social policy."

Third, the Supreme Court's decision leaves untouched prior case law concerning limitations on liability for negligence. Indeed, the Supreme Court purposefully narrowed its focus only on the three intentional torts pled by NECF and set aside, for purposes of its analysis, NECF's claim for negligent interference with economic advantage.

So, are limitations on liability provisions valid as applied to negligence claims, or are they not? The answer is it depends. Liability for "ordinary negligence" may be released in some cases, depending on whether the limitation on liability provision passes muster under a six-factor test. However, when it comes to claims for "gross negligence," the Supreme Court has previously held that "public policy generally precludes enforcement of an agreement that would remove an obligation to adhere to even a minimalstandard of care." Given the Supreme Court's focus in this case on intentional torts, its prior case law concerning the enforceability of limitation on liability provisions in the negligence context remains the law.

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