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Using Business Contracts to Limit Possible Damages Recoverable in Litigation
Under California law, it is possible to use contract language to limit your San Diego business’s liability for damages in the event of future litigation. In general, these are called “Limitation on Damages” clauses and, with exceptions, such provisions are enforceable in California. A good San Diego corporate lawyer can provide advice and counsel in this regard.
San Diego Corporate Law: Legal Principles
The purpose of a limitation of liability clause is to protect a contracting party from unlimited liability. Often the provision is coupled with a cap on damages related to the value of the contract. See example below.
As noted, such contractual provisions are enforceable in California with a couple of exceptions. The first exception concerns situations in which the limitation of liability clause is unconscionable. Unconscionability is most often found where the contract is a result of unequal bargaining power or contrary to public policy. The second exception involves claims of fraud or misrepresentation. Limitation of liability clauses are not enforceable with respect to those types of claims. However, limitation of liability clauses WILL bar claims for ordinary negligence based on contract.
San Diego Corporate Law: Food Safety Net Services v. Eco Safe Systems
The case of Food Safety Net Services v. Eco Safe Systems USA, Inc., 209 Cal. App. 4th 1118 (Cal. App. 2nd Dist. 2012) provides a good case example. In that case, Eco Safe hired Food Safety Net Services (“FSNS”) to review and provide a report to Eco Safe with respect to the safety of its food disinfecting systems and equipment. The contract was signed in 2007. FSNS bargained for and obtained Eco Safe’s agreement to this limitation of liability provision (with the various clauses in all-capital-letters):
“IN NO EVENT SHALL [FSNS] BE LIABLE FOR INDIRECT, SPECIAL, INCIDENTAL OR CONSEQUENTIAL DAMAGES INCLUDING (BUT NOT LIMITED TO) DAMAGES FOR LOSS OF PROFIT OR GOODWILL REGARDLESS OF (A) THE NEGLIGENCE (EITHER SOLE OR CONCURRENT) OF [FSNS] AND (B) WHETHER [FSNS] HAS BEEN INFORMED OF THE POSSIBILITY OF SUCH DAMAGES. [FSNS’] total liability to you in connection with the work herein covered for any and all injuries, losses, expenses, demands, claims or damages whatsoever arising out of or in any way related to the work herein covered, from any cause or causes, shall not exceed an amount equal to the lesser of (a) damages suffered by you as the direct result thereof, or (b) the total amount paid by you to [FSNS] for the services herein covered. We [– FSNS –] accept no legal responsibility for the purposes for which you use the test results.”
In 2008, FSNS conducted the tests required under the contract. However, in 2009, a payment dispute arose and eventually FSNS sued Eco Safe for failure to pay. To defeat the failure to pay lawsuit, Eco Safe filed a counter-lawsuit alleging that FSNS did not properly perform the required testing and that its 2008 report was flawed. Eco Safe sued for negligence, breach of contract, breach of the implied covenant of good faith and fair dealing (bad faith), fraud, and deceit.
Based on the limitation of liability clause set out above, the trial court rejected Eco Safe’s claims with respect to negligence, breach of contract and bad faith. On other grounds, the trial court also rejected Eco Safe’s claims related to fraud and deceit. The trial court awarded judgment to FSNS. The Court of Appeals affirmed on all points. With respect to the limitation of liability clause, the court noted that the contract was not unconscionable. Both parties negotiated the agreement and had equal bargaining power. Likewise, there was nothing about the contract or the limitation of liability provision that was in violation of public policy: The contract involved services provided by one private party to another.
Contact San Diego Corporate Law Today
If you would like more information, contact attorney Michael Leonard, Esq., of San Diego Corporate Law. Mr. Leonard can be reached at (858) 483-9200 or via email. Mr. Leonard has been named a “Rising Star” three years running by SuperLawyers.com and “Best of the Bar” by the San Diego Business Journal.
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