Many are familiar with limited liability provisions in contracts; what is less known is that the courts have placed important limits on those provisions.
But, just to make sure we're all on the same page, let's take a step back and start at the beginning.
What is a Limited Liability Provision?
In broad terms, this is a clause contained in an agreement whereby one party, typically a product user, or a recipient of services, agrees that the other side's exposure to liability will not exceed a certain dollar amount in case things go wrong. Some famous examples of companies' use of these provisions include the fine print on the back of a ticket stub for a sporting event, where the arena's liability is capped at the ticket price, or a manufacturer's attempt to limit its exposure to the purchase price of the product. On this front, the companies' primary concern is capping their exposure on negligence claims, and on that front, the black-letter law is as follows:
"New York courts have routinely enforced liability-limitation provisions when contracted by sophisticated parties, recognizing such clauses as a means of allocating economic risk in the event that a contract is not fully performed." Process Am., Inc. v. Cynergy Holdings, LLC, 839 F.3d 125, 138 (2d Cir. 2016). Federal courts in this district, interpreting New York law, have upheld liability-limitation provisions that exculpated the defendant from broad swaths of liability. See TOA Sys., Inc. v. Int'l Bus. Machs. Corp., No. 18 CV 10685 (VB), 2019 WL 5693388, at *3 (S.D.N.Y. Nov. 4, 2019) (upholding provision barring liability for "any damages [including punitive damages] resulting from loss of . . . profits," regardless of theory of liability)."
Where Courts Have Stepped in, and Invalidated These Provisions
On the other hand, New York's courts have also specifically held that these provisions may not be applied to limit liability for gross negligence, stating:
Not all liability can be exempted, however. Parties may exempt themselves from liability for negligence, but not for willful acts, gross negligence or a "reckless indifference to the rights of others." Sommer v. Fed. Signal Corp., 593 N.E.2d 1365, 1370, 1371 n.3 (N.Y. 1992); Baidu, Inc. v. Register.com, Inc., 760 F. Supp. 2d 312, 318 (S.D.N.Y. 2010).
So when does it constitute "gross negligence," you ask?
"The difference between ordinary negligence and gross negligence is that the latter requires an "act or omission of aggravated character." Curley v. AMR Corp., 153 F.3d 5, 13 (2d Cir. 1998) (citation omitted). To prove gross negligence, the plaintiff must show "that the defendant failed to 'exercise even slight care, scant care, or slight diligence'" (Baidu, 760 F. Supp. 2d at 318 (citation omitted)), or that the defendant's conduct displayed "a reckless disregard for the rights of others" (id. (citation omitted)) or "'smacks' of intentional wrongdoing." Am. Tel. & Tel. Co. v. City of New York, 83 F.3d 549, 556 (2d Cir. 1996) (quoting Colnaghi, U.S.A., Ltd. v. Jewelers Prot. Servs., Ltd., 611 N.E.2d 282, 284 (N.Y. 1993)). Gross negligence differs from ordinary negligence in both kind and degree. Media Glow Dig., LLC v. Panasonic Corp. of N. Am., No. 16 CV 7907 (JFK), 2018 WL 2175550, at *5 (S.D.N.Y. May 11, 2018)."
If you have further questions as to whether the limitation of liability clause in your agreement is enforceable, please feel free to give us a call.