California

Key Issues

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Enforceability of Limitation of Liability Clauses

California –California courts recognize the validity of arm’s-length agreements limiting liability, including waivers of consequential damages.  Provisions in construction contracts that purport to limit liability are valid and enforceable where they are the result of negotiation and agreement between the parties.  Ca. Civ. Code §§ 2782.5; 2782.  See U.S., for the Use of Integrated Energy, LLC v. Siemens Gov’t Techs., Inc., 2017 WL 10562969, at *4–6 (C.D. Cal. May 19, 2017) (granting defendants’ motion for partial summary judgment on damages, holding that the subcontracts’ limitation of liability provisions preclude the recovery of lost profits, and rejecting plaintiff’s argument that the waivers were unenforceable); U.S. v. Global Metals Corp., 2015 WL 12661913, at *9–12 (C.D. Cal. Jan. 12, 2015) (declining to grant summary judgment on defendant’s assertion that the limitation of liability clause in a construction contract was unenforceable as a matter of law due to unconscionability); Markborough Cal., Inc. v. Superior Court, 277 Cal. Rptr. 919, 927 (1991) (upholding a provision in a contract limiting liability to the greater of consultant’s fee or $50,000, despite actual repair costs of $5,000,000).  But see Cal Civ. Code § 1668 (contract provisions seeking to exempt liability for fraud or willful injury are not enforceable). 

In Chinese Hosp. Ass’n v. Jacobs Eng’r Grp., Inc., 2019 WL 6050758 (N.D. Cal. Nov. 15, 2019), plaintiff alleged that defendant breached its agreement to provide architectural services, and defendant sought partial summary judgment on plaintiff’s right to recover consequential damages.  The court granted, in part, defendant’s motion, holding that the contract’s consequential damages waiver – which expressly barred either party from recovering “any damages in the nature of lost profits, lost opportunity or consequential damages of any description, arising directly or indirectly from any breach of duty…” — precluded plaintiff from recovering for lost profits, increased operational costs, and construction delay damages.  2019 WL 6050758, at *1–2. 

In CAZA Drilling (California), Inc. v. TEG Oil & Gas U.S.A., Inc., 48 Cal. Rptr. 3d 271 (Cal. Ct. App. 2006), the court upheld a contractual waiver of consequential damages in an oil drilling contract, and reasoned that “[t]here is nothing to hinder a ‘voluntary transaction[] in which one party, for a consideration, agrees to shoulder a risk which the law would otherwise have placed upon the other party.’”  Id. at 282 (citation omitted).  Under California law, however, a limitation of liability provision in a construction contract may be unenforceable if it is unconscionable or in violation of public policy.  See Cobb v. Ironwood Country Club, 233 Cal. App. 4th 960, 969 (Cal. Ct. App. 2015) (acknowledging that a waiver of an award of punitive or consequential damages “could be deemed unconscionable”); Civic Center Drive Apartments Ltd. P’ship v. Sw. Bell Video Servs., 295 F. Supp. 2d 1091, 1105–06 (N.D. Cal. 2003) (“Generally, provisions limiting liability in construction contracts are enforceable under California law so long as the parties negotiated and expressly agreed to the limitations.  However, such a provision is unenforceable if it is unconscionable or otherwise contrary to public policy.” (internal citation omitted)).

In the context of transactions for the sale of goods, the California Uniform Commercial Code allows a buyer to recover consequential damages from the seller under appropriate circumstances.  See Cal. Com. Code §§ 2711-2714; 2715(2).  However, Cal. Com. Code § 2719 permits the buyer and the seller to contract to limit or exclude consequential damages unless the limitation or exclusion is unconscionable or where the circumstances cause the contractually specified limited or exclusive remedy to fail of its essential purpose.  See, e.g., R Power Biofuels, LLC v. Chemex LLC, No. 16-CV-00716-LHK, 2017 WL 1164296, at *14 (N.D. Cal. Mar. 29, 2017) (analyzing Cal. Com. Code § 2719 in the context of a contract for the design, engineering, and construction of a biodiesel production plant and denying the defendant’s motion to dismiss the plaintiff’s prayer for consequential damages where plaintiff had adequately alleged that the particular terms and conditions “failed of their essential purpose”); San Diego Gas & Elec. Co. v. ABB Inc., 2016 WL 6680205, at *5–7 (S.D. Cal. 2016) (declining to enter summary judgment barring plaintiff from recovering consequential damages, notwithstanding a waiver of consequential damages contractual provision, where a reasonable person could find such damages falling within the ambit of plaintiffs’ replacement costs incurred); A&M Produce Co. v. FMC Corp., 135 Cal. App.3d 473, 481–82, 492–93 (Cal. Ct. App. 1982) (affirming that the contractual limitation on consequential damages was unconscionable where defendant was “the only party reasonably able to prevent [the] loss” and also rejecting defendant’s argument that the consequential damages alleged by plaintiff were too speculative to be the basis for an award of damages).

False Claims Act
California – Cal. Gov’t Code §§ 12650-12656 – The California False Claims Act is substantially similar to the FCA. The California Act defines “claim” similarly to the FCA but applies it to the state and its political subdivisions. See Cal. Gov’t Code § 12650.  Key distinctions in California’s Act include: (1) a requirement that the act be done “knowingly;” (2) a liability provision applicable to a beneficiary of an inadvertent false claim who later discovers the falsity and fails to disclose within a reasonable time after its discovery; (3) joint and several liability for acts committed by two or more persons; and (4) a penalty that is three times the amount of damages sustained by the state or political subdivision, plus costs of the state or political subdivision’s civil action to recover the damages and a civil penalty range of $5,500 to $11,000 for each false claim. Id. § 12651.

Enforceability of Waiver of Consequential Damages Clauses

Topic: Enforceability of Limitation of Liability Clauses
About the Author(s): Dominick Weinkam

California –

Limitations of Liability

California courts recognize the validity of arm’s-length agreements limiting liability; enforcing such agreements in a variety of contexts, including construction contracts.  See Markborough Cal., Inc. v. Superior Court, 227 Cal. App. 3d 705, 716-17 (Ct. App. 1991); Cal. Civ. Code §§ 2782-2782.9 (West 2019).  In CAZA Drilling (California), Inc. v. TEG Oil & Gas U.S.A., Inc., 142 Cal. App. 4th 453 (2006), the court of appeals upheld a limitation of liability in a drilling contract,  explaining that “where the only question is which of two equal bargainers should bear the risk of economic loss in the event of a particular mishap, there is no reason for the court to intervene and remake the parties’ agreement.”  Id. at 475.

California courts distinguish between limitations of liability addressing active and passive negligence.  “For an agreement to be construed as precluding liability for ‘active’ or ‘affirmative’ negligence, there must be express and unequivocal language in the agreement which precludes such liability.  An agreement which seeks to limit generally without mentioning negligence is construed to shield a party only for passive negligence, not for active negligence.”  N. Star Gas Co. v. Pac. Gas & Elec. Co., No. 15-cv-02757, 2016 WL 5358590, at *17 (N.D. Cal. Sept. 26, 2016).

Application of Economic Loss Doctrine

Topic: Enforceability of Limitation of Liability Clauses
About the Author(s): Dominick Weinkam

California –

Limitations of Liability

California courts recognize the validity of arm’s-length agreements limiting liability; enforcing such agreements in a variety of contexts, including construction contracts.  See Markborough Cal., Inc. v. Superior Court, 227 Cal. App. 3d 705, 716-17 (Ct. App. 1991); Cal. Civ. Code §§ 2782-2782.9 (West 2019).  In CAZA Drilling (California), Inc. v. TEG Oil & Gas U.S.A., Inc., 142 Cal. App. 4th 453 (2006), the court of appeals upheld a limitation of liability in a drilling contract,  explaining that “where the only question is which of two equal bargainers should bear the risk of economic loss in the event of a particular mishap, there is no reason for the court to intervene and remake the parties’ agreement.”  Id. at 475.

California courts distinguish between limitations of liability addressing active and passive negligence.  “For an agreement to be construed as precluding liability for ‘active’ or ‘affirmative’ negligence, there must be express and unequivocal language in the agreement which precludes such liability.  An agreement which seeks to limit generally without mentioning negligence is construed to shield a party only for passive negligence, not for active negligence.”  N. Star Gas Co. v. Pac. Gas & Elec. Co., No. 15-cv-02757, 2016 WL 5358590, at *17 (N.D. Cal. Sept. 26, 2016).

Enforceability of No Damages for Delay Clauses

Topic: Enforceability of Limitation of Liability Clauses
About the Author(s): Dominick Weinkam

California –

Limitations of Liability

California courts recognize the validity of arm’s-length agreements limiting liability; enforcing such agreements in a variety of contexts, including construction contracts.  See Markborough Cal., Inc. v. Superior Court, 227 Cal. App. 3d 705, 716-17 (Ct. App. 1991); Cal. Civ. Code §§ 2782-2782.9 (West 2019).  In CAZA Drilling (California), Inc. v. TEG Oil & Gas U.S.A., Inc., 142 Cal. App. 4th 453 (2006), the court of appeals upheld a limitation of liability in a drilling contract,  explaining that “where the only question is which of two equal bargainers should bear the risk of economic loss in the event of a particular mishap, there is no reason for the court to intervene and remake the parties’ agreement.”  Id. at 475.

California courts distinguish between limitations of liability addressing active and passive negligence.  “For an agreement to be construed as precluding liability for ‘active’ or ‘affirmative’ negligence, there must be express and unequivocal language in the agreement which precludes such liability.  An agreement which seeks to limit generally without mentioning negligence is construed to shield a party only for passive negligence, not for active negligence.”  N. Star Gas Co. v. Pac. Gas & Elec. Co., No. 15-cv-02757, 2016 WL 5358590, at *17 (N.D. Cal. Sept. 26, 2016).