Answering a question posed by the Ninth Circuit, the Supreme Court in New England Country Foods v. Vanlaw Food Products held last week that a contract provision “limit[ing] . . . damages for willful injury to the person or property of another is invalid.” The ruling is based on an interpretation of Civil Code section 1668, which provides, “All contracts which have for their object, directly or indirectly, to exempt any one 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.”
The court’s unanimous opinion by Justice Goodwin Liu comes in a lawsuit between two companies that had a contract containing a damages limitation clause. One company accused the other of intentionally undercutting its business.
The court decided that contractually limiting willful injury damages is just as improper as agreeing to eliminate those damages. It said, “contractual releases of tort liability threaten to undermine our tort system’s goal of maintaining community standards of conduct and ensuring wrongdoers compensate those they harm.” And it concluded that “the Legislature did not intend to allow parties to privately negotiate how much they are willing to pay to inflict willful injury.” On the other hand, the court stated, “Section 1668 does not preclude parties from limiting their liability for pure breaches of contract,” even intentional contract breaches.
The Ninth Circuit said there was “an unresolved split of authority on [the damages limitation] question among California state courts.” The Supreme Court found “largely distinguishable” the two cases the Ninth Circuit cited for the limitation-is-valid side of the split (the Second District, Division One, Court of Appeal decision in Farnham v. Superior Court (1997) 60 Cal.App.4th 69 and the Second District, Division Four, opinion in CAZA Drilling (California), Inc. v. TEG Oil & Gas U.S.A., Inc. (2006) 142 Cal.App.4th 453), but, to be safe, the Supreme Court opinion “disapprove[s] of them to the extent they suggest a limitation on damages for willful injury may be valid in some circumstances.” There were no petitions for review in Farnham or CAZA Drilling.
