California law governing exculpatory clauses and contractual limitations of liability

by Allen M Lee8. May 2013 09:16

In commercial contracts, California permits the use of exculpatory clauses and limitations of liability with some exceptions.  A limitation of liability clause permits contracting parties to reduce or eliminate the potential for direct, consequential, special, incidental and indirect damages for breaches of or claims under the contract. An exculpatory clause is a provision that relieves one party of liability altogether for the specified damages.  Below is a summary of the law in California with respect to some common subjects of exculpatory clauses and limitations of liability.

General.  In general, a contract may not exempt from liability for fraud, willful injury to the person or property of another, or violation of law, whether willful or negligent.  Cal. Civ. Code § 1668 (“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”); Health Net of California, Inc., 113 Cal.App.4th at 234 (“It is now settled—and in full accord with the language of the [Cal. Civ. Code § 1668] — that notwithstanding its different treatment of ordinary negligence, under section 1668, ‘a party [cannot] contract away liability for his fraudulent or intentional acts or for his negligent violations of statutory law,’ regardless of whether the public interest is affected”).  
Ordinary Negligence.  Contracts exempting from liability for ordinary negligence are valid where the public interest is not involved and no statute expressly prohibits it.  Health Net of California, Inc. v. Department of Health Services, 113 Cal.App.4th 224, 243 (2003) (“The present view is that a contract exempting from liability for ordinary negligence is valid where no public interest is involved ... and no statute expressly prohibits it”), citing 1 Witkin, Summary of Cal. Law (9th ed. 1987) Contracts, § 631, p. 569; see, e.g., Platzer v. Mammoth Mountain Ski Area, 104 Cal.App.4th 1253, 1258-1259 (2002) (stating that courts have consistently declined to invalidate exculpatory agreements in the recreational sports context).
Where the public interest is involved, exemptions from liability for ordinary negligence are not enforceable.  SeeTunkl v. Regents of University of California, 60 Cal.2d 92, 96 (1963) (finding that a contract between a hospital and an entering patient affects the public interest, the supreme court thereupon invalidated a clause in a hospital admission form that released the hospital from liability for any negligence of its employees) (“obviously no public policy opposes private, voluntary transactions in which one party, for a consideration, agrees to shoulder a risk which the law would otherwise have placed upon the other party”).The California Supreme Court has provided a rough outline of transactions which affect the public interest:
In placing particular contracts within or without the category of those affected with a public interest, the courts have revealed a rough outline of that type of transaction in which exculpatory provisions will be held invalid. Thus the attempted but invalid exemption involves a transaction which exhibits some or all of the following characteristics. It concerns a business of a type generally thought suitable for public regulation.  The party seeking exculpation is engaged in performing a service of great importance to the public, which is often a matter of practical necessity for some members of the public.  The party holds himself out as willing to perform this service for any member of the public who seeks it, or at least for any member coming within certain established standards.  As a result of the essential nature of the service, in the economic setting of the transaction, the party invoking exculpation possesses a decisive advantage of bargaining strength against any member of the public who seeks his services.  In exercising a superior bargaining power the party confronts the public with a standardized adhesion contract of exculpation, and makes no provision whereby a purchaser may pay additional reasonable fees and obtain protection against negligence. Finally, as a result of the transaction, the person or property of the purchaser is placed under the control of the seller, subject to the risk of carelessness by the seller or his agents.  Tunkl, 60 Cal.2d at 98-101.  
Gross negligence.  California does not recognize any cause of action for “gross negligence” unless such an action is directly, or at least implicitly, authorized by one of the numerous statutes that employ gross negligence as the applicable standard.  City of Santa Barbara v. Superior Ct., 41 Cal.4th 747, 779 (2007); Continental Ins. Co. v. American Protection Industries, 197 Cal.App.3d 322, 328-30 (1987) (“we conclude that no defensible reason exists for categorizing wilful [sic] and wanton misconduct as a different kind of negligence not suitable for comparison with any other kind of negligence . . . any attempt to categorize gross negligence separately from ordinary negligence is unnecessary”). 
Strict products liability.  Exemptions from strict products liability are not enforceable.  Westlye v. Look Sports, Inc., 17 Cal.App.4th 1715, 1741-47 (1993) (“We conclude that, as a matter of public policy, product suppliers cannot insulate themselves from strict liability in tort for injuries caused by defects in products they place on the market by obtaining a consumer's signature on an express assumption of risk”).  
Limitation of Liability.  Limitation of liability clauses, as opposed to a complete exemption from all liability, may be permissible.  See, e.g., Farnham v. Superior Ct. of Los Angeles County, 60 Cal. App. 4th 69, 77 (1997) (permitting a contractual limitation on the liability of directors for defamation arising out of their roles as directors where the injured party retains his right to seek redress from the corporation) (“Although exemptions from allliability for intentional wrongs, gross negligence and violations of the law have been consistently invalidated . . . we have not found any case addressing a limitation on liability for intentional wrongs, gross negligence or violations of the law”) (emphasis in original). 
Unconscionability.   A court may void a limitation of liability or exculpatory clause where such clause is unconscionable.  Cal. Civil Code § 1670.5(a) provides that “[i]f the court as a matter of law finds the contract or any clause of the contract to have been unconscionable at the time it was made the court may refuse to enforce the contract, or it may enforce the remainder of the contract without the unconscionable clause, or it may so limit the application of any unconscionable clause as to avoid any unconscionable result.”  As one court has held, 
Unconscionability has generally been recognized to include an absence of meaningful choice on the part of one of the parties together with contract terms which are unreasonably favorable to the other party. Phrased another way, unconscionability has both a ‘procedural’ and a ‘substantive’ element.  The procedural element focuses on two factors: "oppression" and "surprise." Oppression" arises from an inequality of bargaining power which results in no real negotiation and "an absence of meaningful choice." "Surprise" involves the extent to which the supposedly agreed-upon terms of the bargain are hidden in a prolix printed form drafted by the party seeking to enforce the disputed terms. Characteristically, the form contract is drafted by the party with the superior bargaining position. Of course the mere fact that a contract term is not read or understood by the nondrafting party or that the drafting party occupies a superior bargaining position will not authorize a court to refuse to enforce the contract. Although an argument can be made that contract terms not actively negotiated between the parties fall outside the "circle of assent" which constitutes the actual agreement, commercial practicalities dictate that unbargained-for terms only be denied enforcement where they are also substantively unreasonable.  No precise definition of substantive unconscionability can be proffered. Cases have talked in terms of "overly harsh" or "one-sided" results.  One commentator has pointed out, however, that "... unconscionability turns not only on a 'one-sided' result, but also on an absence of 'justification' for it.", which is only to say that substantive unconscionability must be evaluated as of the time the contract was made.  The most detailed and specific commentaries observe that a contract is largely an allocation of risks between the parties, and therefore that a contractual term is substantively suspect if it reallocates the risks of the bargain in an objectively unreasonable or unexpected manner.  But not all unreasonable risk reallocations are unconscionable; rather, enforceability of the clause is tied to the procedural aspects of unconscionability such that the greater the unfair surprise or inequality of bargaining power, the less unreasonable the risk reallocation which will be tolerated.                 
A & M Produce Co. v. FMC Corp., 135 Cal.App.3d 473 (1982).   
California Uniform Commercial Code. The California Uniform Commercial Code (“UCC”), applicable to goods, provides additional limitations.  For purposes of the UCC, “ ‘Goods’ means all things (including specially manufactured goods) which are movable at the time of identification to the contract for sale other than the money in which the price is to be paid, investment securities . . .  and things in action.” Cal. Com. Code § 2105(1). 
  • “Where circumstances cause an exclusive or limited remedy to fail of its essential purpose, remedy may be had as provided in this code.” Cal. Com. Code § 2719(2).
  • “Consequential damages may be limited or excluded unless the limitation or exclusion is unconscionable.   Limitation of consequential damages for injury to the person in the case of consumer goods is invalid unless it is proved that the limitation is not unconscionable. Limitation of consequential damages where the loss is commercial is valid unless it is proved that the limitation is unconscionable.” Cal. Com. Code § 2719(3). 
Other references.  The following is an overview of the laws in the fifty states governing contractual Limitations of Liability, Warranties and Remedies (2006):

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