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 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.”

After its contract with Trader Joe’s had expired, NECF 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 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.

Parties negotiating contracts should be aware of this decision, particularly when considering choice of law provisions.