In a decision with wide-reaching implications for commercial contracts, the California Supreme Court in New England Country Foods LLC v. Van Law Food Products, Inc., reaffirmed strong public policy against insulating parties from liability for willful injury. The court held that Civil Code §1668 prohibits not only contractual clauses that entirely exempt a party from liability but also provisions that merely list the available damages for willful misconduct. In doing so, the Court disapproved earlier decisions that suggested some damage limitations for intentional torts might be enforceable. This ruling sends a clear message that parties cannot bargain away accountability for intentionally harmful conduct.
Background Facts
The dispute between New England Country Foods LLC (NCEF) and Van Law Food Products, Inc. began as a typical manufacturing arrangement but ultimately escalated into a legal battle over alleged commercial sabotage. NECF, a Vermont-based company, had been supplying its popular "TJ's Bold & Smoky Kansas City Style Barbecue Sauce" to Trader Joe's since 1999. Originally manufacturing the sauce in-house, NECF later contracted with Van Law in 2015 to produce, ship, and bill for the sauce under a three-year manufacturing agreement.
The parties' contract included two key provisions relevant to the later litigation:
- A non-reverse engineering clause, prohibiting Van Law from replicating NECF's barbecue sauce recipe.
- A limitation of liability clause, which capped damages and excluded certain categories of damages- including lost profits, consequential damages, and punitive damages, to the extent permitted by law.
As the contract's expiration approached, NECF alleged that Van Law secretly prepared to bypass NECF altogether. According to NECF's complaint, Van Law's president began negotiating directly with Trader Joe's, offering to replicate NECF's barbecue sauce in the event renewal talks fell through. NCEF later uncovered these communications in unrelated litigation over another product.
Ultimately, NCEF and Van Law failed to reach an agreement on new contract terms, and Trader Joe's ended its long-standing relationship with NECF. Van Law, however, was unable to successfully replicate the source, and Trader Joe's ceased selling the product entirely.
NCEF filed suit in federal court, asserting claims for breach of contract, intentional interference with contractual relations, intentional and negligent interference with prospective economic advantage, and breach of fiduciary duty. The complaint sought approximately $6 million in lost profits and punitive damages.
Certified Question to the California Supreme Court
Can a contractual provision that limits damages for intentional torts, specifically, willful injury to person or property, stand under Civil Code §1668?
Civil Code Section 1668
At the heart of the dispute is California Civil Code §1668, which codifies the state's long-standing public policy against allowing parties to contract away liability for serious misconduct. Section 1668 states. "All contracts which have for their object, directly or indirectly, to exempt anyone 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."
California courts have consistently interpreted this provision as a strong safeguard against contractual attempts to excuse future intentional wrongdoing. The statute embodies a "traditional skepticism" toward efforts to release liability for future torts, especially willful acts that violate societal standards of conduct. City of Santa Barbara v. Superior Court (2007) 41 Cal.4th 747, 754.
While contracts are meant to enforce the will of the parties, tort law serves the broader purpose of protecting the public and promoting accountability. Allowing a party to escape liability for intentional harm would undermine these goals by effectively granting a license to commit serious wrongs without consequence. Section 1668 prevents this outcome by ensuring that individuals and businesses remain accountable for deliberate harm to others' persons or property. For example, in Tunkl v. Regents of University of California, (1963) 60 Cal.2d 92, the court invalidated waivers of liability for negligence where the contract affected the public interest, establishing a six-factor test for determining when such releases are unenforceable.
In City of Santa Barbara v. Superior Court, (2007) 41 Cal.4th 747, 754, the court held that releases for gross negligence are generally void because public policy demands at least minimal standards of care. More recently, in Castelo v. Xceed Financial Credit Union, (2023) 91 Cal. App.5th 777, 789, the Court of Appeal reiterated that §1668 prevents parties from granting themselves advance permission to commit serious wrongs.
Willful Injury vs. Breach of Contract
In the case at hand, the question focused on claims involving tortious conduct, not mere breach of contract as NECF's lawsuit included tort-based causes of action. For purposes of answering the question, the California Supreme Court assumed the claims involved willful injury to property, the type of misconduct covered by §1668's prohibition.
This distinction between contractual claims and tort claims was critical to the court's analysis. While parties may sometimes limit remedies for breach of contract, they may not contractually shield themselves from liability for independently tortious conduct that causes deliberate harm.
In rejecting Van Law's arguments, the California Supreme Court made clear that courts do not apply a case-by-case, context specific analysis when determining whether a contract clause shielding a party from liability for willful injury is enforceable. Section 1668 establishes the categorical rule that all contracts attempting to exempt a party from lability for its own willful injury to person or property are void as a matter of public policy.
Van Law urged the court to carve out an exception for commercial disputes between sophisticated business entities, arguing that the manufacturing contract was the product of private bargaining. The court firmly rejected this argument, As the court explained, §1668 states such clauses, are "against the policy of the law," not merely disfavored in some situations. The court pointed to Westlake Community Hospital v. Superior Court, (1976) 17 Cal.3d 465, where it struck down a release of liability in hospital bylaws without any inquiry into the surrounding circumstances. There, a physician alleged intentional torts by the hospital and its staff, and the court held that §1668's plain language invalidated the release in its entirety when applied to intentional misconduct.
The court also emphasized consistency with City of Santa Barbara v. Superior Court, in which the court held that liability waivers for gross negligence are categorically unenforceable, regardless of whether the transaction involved private parties or affected public interest. The court reasoned if California law prohibits waivers for gross negligence without examining the surrounding context, the same rule logically applies with even greater force to willful misconduct, which implies an even higher degree of wrongdoing.
The court concluded in cases of willful injury, the inquiry is not whether the transaction served the public or whether the parties had equal bargaining power as outlined by the Tunkl case. When a party seeks to protect itself in advance from the consequences of its own deliberate harm to another's person or property, such a release is unenforceable in every context. Epochal Enterprises, Inc. v. LF Encinitas Properties, LLC, (2024) 99 Cal.App.5th 44.
The court emphasized the statutory text, which bars any contract that seeks "directly or indirectly" to exempt a party from responsibility for willful harm. The term exempt, the court explained, does not require a contract to eliminate all forms of liability to be invalid. Even partial limits on liability, such as clauses capping damages, can amount to an unlawful exemption if they reduce a wrongdoer's accountability for intentional misconduct.
The court reasoned that reading §1668 narrowly by permitting limitations on certain damage categories, would undermine the statute's purpose of preventing parties from pre-negotiating the price of committing intentional harm.
Safeguarding the Tort System Against Aggravated Wrongs
The court further explained that tort law reflects society's interest in deterring serious misconduct and ensuring that wrongdoers compensate victims. Allowing parties to limit liability for willful torts would erode these principles. California has long forbidden insurance coverage for willful torts for similar policy reasons. Parties cannot circumvent public policy by privately agreeing to limit their financial responsibility for deliberate harm.
The decision aligns with widespread authority in other jurisdictions rejecting both full releases and limitations on damages for intentional misconduct. Courts in states like New York, Colorado, Nebraska, and Georgia have held that public policy prohibits both exculpatory clauses and damage limitations that would allow parties to avoid full responsibility for willful or grossly negligent misconduct.
Ultimately, the court held that section 1668 prohibits any contractual provision, whether framed as a full release or a damage cap, that limits liability for willful injury to persons or property. This reading of the statute, the court concluded, is necessary to uphold public policy, deter intentional misconduct, and ensure tort victims have meaningful remedies.
Conclusion
The Van Law decision confirms that California courts take a broad view of Civil Code's prohibition against contractual limitations on liability for willful injuries. Businesses and their counsel should carefully review limitation of liability clauses to ensure they do not run afoul of this public policy, particularly when the risk of willful misconduct is present. While the ruling preserves the ability to limit liability for negligence and other non-willful conduct, it leaves no room for limiting damages stemming from intentional harm.