California Supreme Court Restricts Enforceability of Contractual Limitation of Liability Provisions

On April 24, 2025, the California Supreme Court held that Civil Code section 1668 prohibits contractual limitation of liability provisions that either exculpate or limit a party’s liability for intentional torts. The holding came in the matter of New England Country Foods, LLC (“NECF”) v. VanLaw Food Products, Inc. (“VanLaw”), case no. S282968, in which NECF alleged that VanLaw intentionally undercut its business by secretly promising to replicate NECF’s barbecue sauce and sell it directly to Trader Joe’s.

NECF had contracted with VanLaw to provide manufacturing, shipping and billing services for NECF’s sales of barbecue sauce to Trader Joe’s. As the three-year contract was approaching an end, the parties began negotiating terms of renewal. Unbeknownst to NECF, VanLaw was also pursuing a backup plan with Trader Joe’s to clone NECF’s barbecue sauce and sell it directly to Trader Joe’s. NECF asserted that because of VanLaw’s promise to clone the barbecue sauce, Trader Joe’s ended it long relationship with NECF and, when VanLaw was ultimately unable to replicate the barbecue sauce, Trader Joe’s stopped selling it altogether.

NECF then filed suit against VanLaw alleging tortious interference and other claims. In response to NECF’s claims, VanLaw asserted that the following contractual provisions limited NECF’s possible damages:

“To the extent allowed by applicable law: (a) in no event will either party be liable for any loss of profits, loss of business, interruption of business, or for any indirect, special, incidental or consequential damages of any kind, even if such party has been advised of the possibility of such damages; and (b) each party’s entire liability to the other party for damages concerning performance or nonperformance by such party in any way related to the subject matter of this Agreement, and regardless of the form of any claim or action, will not exceed the amount of gross revenues earned by [VanLaw] or NECF from the Products, whichever is greater, for the twenty-four (24) months prior to the events giving rise to the alleged liability.”

“…in no event shall either party be liable for any punitive, special, incidental or consequential damages of any kind (including but not limited to loss of profits, business revenues, business interruption and the like), arising from or relating to the relationship between [VanLaw] and NECF, regardless of whether the claim under which such damages are sought is based upon breach of warranty, breach of contract, negligence, tort, strict liability, statute, regulation or any other legal theory or law, even if either party has been advised by the other of the possibility of such damages.”

Civil Code section 1668 provides: “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.” In reaching its holding that the contractual limitations of liability are not applicable to the facts at hand, the Court noted that (i) this case implicated section 1668’s prohibition on releases of liability for “willful injury to the person or property of another,” (ii) allowing parties to release liability for willful injury would be incongruous with the Court’s decision in City of Santa Barbara v. Superior Court (2007), 41 Cal.4th 747, where the Court held that attempts to eliminate liability for gross negligence are categorically unenforceable, (iii) the purpose of the statute is to prohibit parties from granting themselves licenses to commit future aggravated wrongs, and (iv) that limitations on damages are invalid in the same circumstances as full releases.

Parties negotiating contracts applying California law need to understand how this case affects their ability to contractually allocate risk as it clearly holds that certain potential liabilities cannot be allocated or limited. In addition, for parties evaluating litigation, this case may undermine the viability of citing contractual limitation of liability provisions as an affirmative defense to all claims between contracting parties.