Limitation of Liability Clauses — Does It Mean You Can Breach With Impunity?

7/11/18 | By: Randy J. Heller, Esq.| GDB 2018 Summer Newsletter

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Limitation of liability clauses are all the rage, whether among participants on a construction project or in other fields.  In the construction world they typically provide that one party cannot be liable to the other for any damages due to delays on the project.  Other examples provide that one party’s liability on the project may not exceed a stated cap.
 
Such clauses are now routinely enforced by the courts since they “represent the parties’ agreement on the allocation of the risk of economic loss in the event that the contemplated transaction is not fully executed.”  Although they may often seem to be unfair, the courts will let sophisticated parties negotiate their own deal and will “let them lie on the bed they made.”       

Limits to Enforceability of Limitation of Liability Clauses

However, there are limits to how one-sided such clauses can be.  The courts have held these clauses to be unenforceable when “in contravention of acceptable notions of morality, the misconduct for which it would grant immunity smacks of intentional wrongdoing.”  In other words, if one party acts in a fraudulent, malicious or grossly negligent manner, it will not be able to hide behind a limitation of liability clause.
 
Historically, one party to a contract has always been free to breach a contract so long as it is prepared to pay damages for its breach.  Does that “intentional” breach nullify the limitation of liability clause, or does the breaching party still have the protections of that clause?

A Recent Case

A recent case by the appellate court in Manhattan held that so long as the breach was in the party’s “legitimate” economic self-interest, it would not be deemed to be the type of intentional wrongdoing which would void the protections of the limitation of liability clause. Stated another way, “a party can intentionally breach a contract to advance a ‘legitimate economic self-interest’ and still rely on the contractual limitation provision.”

Broad Enforcement

Limitation of liability clauses are broadly enforced and there is precious little room to escape them.  Proving intentional wrongdoing or gross negligence involves having to establish that the other party’s action “betokens a reckless indifference to the rights of others.”  But as is made clear in this recent case, even an action which seems gratuitously malicious might not in certain circumstances serve to void the limitation of liability clause as long as it was done for one's legitimate economic self-interest.