This is the second installment of a nationwide survey report we’re working on here at SLG, which will ask the questions listed below of each of the fifty U.S. states. Here’s our New York coverage. Next up:

CALIFORNIA

I. LIMITS OF LIABILITY

Are contractual caps, ceilings, or limits on direct damages enforceable?

Yes. Courts in California uphold contractual provisions that limit liability for contract breach damages, including for ordinary negligence. Health Net of California, Inc. v. Department of Health Services, 113 Cal.App.4th 224, 243 (2003). Except, that is, when (i) the applicable provision affects the public interest, or (ii) another statute expressly prohibits it. For example, per the California Civil Code, a contractual limit of liability for fraud, willful injury, or violation of law would be unenforceable, Civ. C. § 1668, as may deals struck between parties of unequal bargaining power (more on this below). Also, California courts may kill limits of liability that are unconscionable. Civ. C. § 1670.5(a).

Are agreements that exclude all indirect (i.e. consequential, incidental) damages enforceable?

Yes. Under the California Commercial Code, consequential damages may be “limited or excluded unless the limitation or exclusion is unconscionable.” Cal. Com. Code § 2719(3). However, where consequential damages are limited “for injury to the person in the case of consumer goods,” such limitation is invalid unless proved not unconscionable. Id.

Can remedies be limited to those express remedies solely and exclusively provided for in a contract?

Yes. For example, a sales contract may limit liability to the “return of the goods and repayment of the price or to repair and replacement of nonconforming goods or parts.” Cal. Com. Code § 2719(1)(a). Also, for a stated remedy to be exclusive and mandatory, its exclusivity must be expressly agreed—otherwise, it’s only “optional.” Cal. Com. Code § 2719(1)(b).

II. DAMAGES

Does California mandate any blanket limits on the amount of (a) consequential damages, or (b) punitive damages that a party may recover in commercial contracts?

(a) No. However, recovering consequential (or “special”) damages requires that those damages were “foreseeable by the parties at the time of contracting.” Martin v. U-Haul Co. of Fresno (1988) 204 Cal. App. 3d 396, 409. Meaning, the breaching party (i) knew, or (ii) should’ve known his/her breach may instigate these damages.

(b) No. However, punitive damages must stem from a tort, not a contract breach alone. Civ. C. § 3294(a).

Are punitive damages recoverable in contract matters? If so, when?

No. Punitive damages are generally unavailable for breach of contract, even where the defendant was malicious, willful, or fraudulent. However, if a tort (i.e. fraud) independent to a breach of contract is pled and proven, punitive damages may be available. Cates Construction, Inc. v. Talbot Partners (1999) 21 C4th 28.

III. DISCLAIMERS/LIMITATIONS OF WARRANTY

Are disclaimers of any and all implied warranties enforceable in California?

Yes. To disclaim the implied warranty of merchantability, a disclaimer must: (i) mention merchantability, and (ii) when written, be written conspicuously. Cal. Com. Code § 2316(2). To disclaim the implied warranty of fitness, a disclaimer must be written conspicuously. Id. The following also eliminate or modify implied warranties:

- Expressions like “as is” or “with all faults,” which spotlight the exclusion of implied warranties. Cal. Com. Code § 2316(3)(a).

- The buyer examining the subject goods/sample/model “as fully as he desired,” or refusing to examine the goods—but only regarding defects an examination ought to have “revealed to him.” Cal. Com. Code § 2316(3)(b).

- A course of dealing, course of performance, or usage of trade that is counter to the implied warranties. Cal. Com. Code § 2316(3)(c).

- Liquidated damages or limits of liability provisions. Cal. Com. Code § 2316(4).

IV. DISPUTE RESOLUTION

When the State of California is sued over a contract dispute, are there any mandatory dispute resolution procedures such as venue requirements or jury trial requirements?

No, generally. In most scenarios, when suing a California agency for breach of contract, plaintiff must file an administrative claim within one year of the date of the alleged breach. The government has 45 days to respond. If the government agency denies the claim during the 45 days, plaintiff has 6 months to file a lawsuit in court from date the agency mailed the denial or personally delivered this “right to sue letter” to plaintiff. California Government Code § 945.6. If Plaintiff does not receive this letter (i.e. the government takes no responsive action to plaintiff’s claim) within 45 days, plaintiff has two years to file a lawsuit from the date of the alleged breach.

Exception: as of late 2016, many California public entities and contractors involved in public works construction must adhere to specific dispute resolution processes, both informal (“meet and confer”) and formal (mediation, an alternative non-binding process, civil action, or arbitration), for disputed claims of payment. Assembly Bill No. 626.

V. ADDITIONAL NOTES

1. Pertaining to liability caps: A liability cap provision affects the public interest if it exhibits “some or all of the following characteristics.” Tunkl v. Regents of University of California, 60 Cal.2d 92 (1963). (i) It concerns a business of a type generally thought suitable for public regulation. (ii) The breaching party performs a service of great importance to the public, which is often a matter of practical necessity for some members of the public. (iii) The breaching party holds itself 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. (iv) Due to the essential nature of the service, in the economic setting of the transaction, the breaching party possesses a decisive advantage of bargaining strength against any member of the public who seeks its services. (v) In exercising a superior bargaining power, the breaching 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. (vi) 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. So: the less equal the bargaining power, and/or the more publicly important the contract’s subject (i.e. health care services), the less enforceable the applicable limitation clause.

2. Pertaining to liability caps: Regarding contracts for goods (i.e. manufactured goods), the California Commercial Code adds another exception to the enforceability of limits of liability provisions, providing that where “circumstances cause an exclusive or limited remedy to fail of its essential purpose, remedy may be had as provided in this code [i.e. via restitution under Cal. Com. Code § 2718].” Cal. Com. Code § 2105(2).

3. Pertaining to unconscionability overall: “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.” A & M Produce Co. v. FMC Corp., 135 Cal.App.3d 473 (1982). Both the substantive and procedural elements inherent to this analysis are necessary for a court to rule a contract unconscionable and so, unenforceable. Little v. Auto Stiegler, Inc. (2003) 29 Cal.4th 1064.