Contract Limitations on Damages Will Not Diminish Tort Damages for Willful Injuries

It is not uncommon for commercial contracts – or even consumer contracts – to contain limitations on damages. Our clients ask how that limitation may apply when tort damages are claimed. In a recent case, the California Supreme Court answered this question by holding that such damage limitations are unenforceable when the tort claims allege willful misconduct, citing Civil Code § 1668.

The action arose from a commercial contract for the sale of barbeque sauce between the manufacturer and a retail purchaser, Vanlaw Food Products. Damages for any future breach were contractually limited to gross revenues earned in a two-year period prior to the breach.

The sauce manufacturer, NEFC, discovered that the defendant was planning to “clone” the sauce recipe and make its own brand, rather than negotiate in good faith for contract renewal. NEFC then sued in federal court alleging breach of contract and various intentional torts. It sought $6 million in past and future lost profits as well as punitive damages. A motion to dismiss filed by defendant Van Law Foods (Trader Joe’s) was granted. The district court reasoned that the contract only permitted for direct damages and injunctive relief, but the lawsuit sought lost profits, attorneys’ fees and costs, and punitive damages.

Then NEFC filed an amended complaint alleging that if the limitation on damages in the contract applied, it would completely exempt Vanlaw Food Products from liability. NEFC argued that a contracting party cannot bar liability for “willful injury to the person or property of another” citing Civil Code § 1668. On appeal, the Ninth Circuit asked the California Supreme Court to review this question: Is a contractual clause that substantially limits damages for an intentional wrong but does not entirely exempt a party from liability for all possible damages valid under California Civil Code § 1668?

The Supreme Court decision in New England Country Foods LC v. Vanlaw Food Products, LLC, 17 Cal.5th 703 (April 24,2025) focused only on the three tort causes of action. The court assumed without deciding that all three required “willful injury.” The Court unanimously ruled that the Civil Code was violated when the contract limited a party’s right to recover damages for causing willful, tortious injury.

In reaching this conclusion, the Supreme Court held that Civil Code § 1668 was not limited to pre-accident releases of liability (such are commonly found in recreational activity releases). Section 1668 begins with the phrase, “All contracts which have as their object, directly or indirectly, to exempt anyone from responsibility for his or her own fraud, willful injury to the person or property of another or violation of law, whether willful or negligent are against the policy of the law.” The Supreme Court held the statute should be broadly interpreted, and it should be applied to commercial contracts even if the provision merely limited the type of damages recoverable.

The Supreme Court observed that section 1668 does not preclude parties from limiting their liability for pure breaches of contract in the absence of any independent tort. While correct in theory, the ramifications of this decision certainly breathe new life into creative lawyers who will strive to characterize “pure” breaches of contract (such as a failure to perform a contract) as tortious to evade limitations on damages. In order to defend lawsuits with contracts limiting damages, defendants should be mindful of seeking to obtain early dismissal of illegitimate willful tort causes of action.

Near the end of the opinion, there is a useful discussion of what is not a tortious breach of contract, and the importance of the “economic loss” rule. Defendants should be mindful to analyze alleged business torts pled in a complaint to determine if claims such as wrongful interference with contract or prospective business advantage apply or not. Eliminating meritless business tort claims then will allow the defendant to assert the contractual limitation on damages free from the shadow of Civil Code § 1668.

A copy of the case can be found here

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