The California Supreme Court recently issued a decision in New England Country Foods, LLC v. Vanlaw Food Products, Inc. (Case No. S282968) that clarifies how businesses should draft limitation of liability clauses.
New England Country Foods (NECF), a Vermont-based supplier of specialty food products, had long provided its “TJ’s Bold & Smoky Kansas City Style Barbecue Sauce” to the grocery store Trader Joe’s. In 2015, NECF contracted with Vanlaw Food Products, Inc. to manufacture the sauce. Their agreement included a limitation of liability provision that included a cap on each party’s liability. The agreement also included a critical provision prohibiting Vanlaw from reverse-engineering the recipe.
Despite this restriction, NECF alleged that Vanlaw reverse-engineered the sauce and began selling a similar product directly to Trader Joe’s, effectively cutting NECF out of the supply chain. NECF brought claims including tortious interference against Vanlaw in federal court. The district court dismissed the action, citing the limitation of liability clause in the manufacturing agreement between NECF and Vanlaw. On appeal, the Ninth Circuit asked the California Supreme Court to determine whether such a clause could limit damages for intentional wrongs under California law.
The Court considered whether a contractual provision that substantially limits damages for an intentional wrong, but does not entirely exempt liability, is enforceable under California Civil Code section 1668, which prohibits contracts from exempting a party from responsibility for their own fraud or willful injury to the person or property of another.
The California Supreme Court ruled that under Civil Code section 1668, any contract provision that limits liability for “willful injury to the person or property of another” is invalid. The Court emphasized that public policy prohibits shielding parties from the consequences of their intentional misconduct, even if a limitation clause technically leaves some minimal damages available.
The Court therefore deemed that Vanlaw’s attempt to use a limitation of liability clause to avoid responsibility for alleged intentional wrongdoing was unenforceable.
The Court’s decision strengthens the principle that businesses must remain accountable for intentional wrongful acts, regardless of contractual attempts to limit exposure.
This ruling is a reminder that limitation of liability clauses should be crafted carefully to ensure that they do not attempt to restrict liability for intentional wrongdoings.