When Does Intentional Wrongdoing Render a “Limitation of Liability” Clause Unenforceable?
February 15, 2018
That was the issue presented to the Appellate Division, First Department in Electron Trading, LLC v. Morgan Stanley & Co. LLC, which was an appeal from the grant of defendant’s motion to dismiss a contractual claim seeking damages above the amount allowable under the contract’s limitation of liability clause. Justice Saliann Scarpulla granted defendant’s motion to dismiss that portion of the breach of contract claim, notwithstanding plaintiff’s allegations in the complaint that the defendant engaged in wrongdoing and, as such, could not avail itself of the limitation of liability clause. Her decision and order was affirmed by the First Department.
The case involved a developer of an alternative trading system (“ATS”), designed to be operated through a “dark pool”, that is, a “private exchange where investors can make trades anonymously.” Plaintiff and defendant entered into an exclusive licensing agreement (“ELA”) and a consulting services agreement (“CSA”). Although neither agreement refers to “dark pools,” plaintiff later claimed defendant breached the ELA based upon defendant’s insistence that it would perform only if plaintiff modified the agreement to allow defendant’s high-frequency traders to use it with other customers. Although defendant conceded breach for purposes of the motion to dismiss, the ELA provided a limitation of liability clause, limiting total liability to amounts paid under the agreement.
Generally, “limitation of liability” clauses are routinely enforced, letting the parties to such a clause, “lie on the bed they made”, says the Court of Appeals in Metropolitan Life Ins. Co. v. Noble Lowndes Invtl. There are circumstances, however, when a court will ignore the limitation clause when, for example, there is misconduct that “smacks of intentional wrongdoing”, or involves “gross negligence” displaying a reckless indifference. Id.
Because the complaint here did not detail factual allegations as to the misconduct and “[a]t most . . . support[ed] a claim of intentional breach”, the Appellate Division unanimously affirmed. The court reasoned that the allegations did not meet the heightened standard of pleading for fraud claims under CPLR 3016(b). An interesting side note is that the case decided defendant’s motion to dismiss the complaint, but in effect decided the viability of a “limitation of liability” clause — something that is ordinarily pleaded as an affirmative defense. The First Department noted, however, that the courts can consider whether documentary evidence (here the clause contained in the contract at issue) establishes an asserted defense.
When faced with a “limitation of liability” clause, consider whether the breaching party’s conduct amounts to “wrongful conduct” sufficient to vitiate the clause. However, a heightened pleading standard applies. The courts appear to abide by parties’ agreed upon limitation clause, unless the conduct rises to a significant level of misconduct. Courts are unlikely to set aside such limitations lightly. Remember, a mere “intentional breach” is not enough.