This post is a preview 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. Our preview, like the coming survey, discusses the keys to contract disputes: (i) limits of liability, (ii) damages, (iii) warranty disclaimers, and (iv) dispute resolution—and the parameters of each within the subject State.
For now, New York seemed a fine place to start.
I. LIMITS OF LIABILITY
Are contractual caps, ceilings, or limits on direct damages enforceable?
Yes. Unless the damages stem from gross negligence or willful misconduct, as discussed below.
Are agreements that exclude all indirect (i.e. consequential, incidental) damages enforceable?
No. New York courts insert an implicit exception to these blanket caps, even if the applicable agreements explicitly don’t. Where the damages at play arise from gross negligence or willful misconduct, public policy dictates the offenders are limitlessly liable, and the cap fails. So, no matter what, liability for such egregious behavior is unlimited.
Despite this exception, caps on indirect damages are enforceable against other (less egregious) claims.
Additional Notes on Gross Negligence in New York:
1. Drafters should note that evidencing gross negligence or willful misconduct can be difficult, these standards high. Parties must show that a breaching party’s “egregious intentional misbehavior evince[s] some extreme culpability.” Otherwise, no gross negligence or willful misconduct is present, and the relevant liability remains limited under the contract. Metropolitan Life Ins. Co. v. Noble Lowndes Int'l, Inc., 643 N.E.2d 504, 506-07 (N.Y. 1994) (defendant’s “voluntary and intentional … refusal to perform a contract [to develop and install software] for economic reasons,” without plaintiff proving fraud or other willful intent, fell short of gross negligence and willful misconduct and the limit of liability survived; also, entering a contract intending never to perform is not in itself gross negligence or willful misconduct).
Can remedies be limited to the express remedies solely and exclusively provided for in a contract?
Yes. Per New York’s adoption of the Uniform Commercial Code ("UCC") § 2-316 (more on this below), remedies for breach of warranty may be limited to liquidation or limitations of damages as captured by a contract, or via a contractual modification of the subject remedies. However, these routes carry their own rules and limitations. For example, per UCC § 2-718, liquidated damages must represent “an amount which is reasonable in the light of the anticipated or actual harm caused by the breach, the difficulties of proof of loss, and the inconvenience or nonfeasibility of otherwise obtaining an adequate remedy.” An unreasonably large liquidation of damages is, therefore, void.
Does New York law mandate any blanket limits on the amount of (a) consequential damages, or (b) punitive damages that a party may recover?
(a) No. Unlimited consequential damages resulting from a breach of contract are generally available to parties under traditional contract principles. That is, so long as these damages were (i) a foreseeable result of the breach; (ii) “within the contemplation of the parties” when contracted; and (iii) not unconscionable. The UCC adds that consequential damages may be limited or excluded—except where those limits or exclusions are unconscionable themselves. UCC § 2-719 (3).
1. Similarly, courts will generally enforce a contractual cap on consequential damages unless the cap is unconscionable, violates public policy, or enforcement causes the contract to fail of its essential purpose. Taylor Inv. Corp. v. Weil, 169 F. Supp. 2d 1046, 1058-59 (D. Minn. 2001). If the provision was reasonable and negotiated as part of an arms-length agreement, however, proving unconscionability may be difficult. Finally, New York does not allow a manufacturer to disclaim liability borne of its own gross negligence, willful, wanton or intentional conduct. Kalisch-Jarcho Inc. v. New York, 58 N.Y.2d 377, 448 N.E.2d 413 (N.Y. 1983).
2. In recent years New York made it possible for policyholders to squeeze insurers for unlimited consequential damages for breach of policy. This remedy is available where the insurer’s denial of policy benefits (i) breaches the covenant of good faith and fair dealing; and (ii) the applicable damages were foreseeable at the contracting time.
Are punitive damages recoverable in contract matters? If so, when?
Generally, no. Even if a breach is willful and without justification. Campo v. 1st Nationwide Bank, 857 F.Supp. 264, 273 (EDNY 1994).
1. Contract claims fused with tort claims may earn punitive damages. Meaning, where a tort claim stems from a contractual relationship. There a plaintiff must show: (i) the defendant’s conduct is actionable as an independent tort; (ii) the tortious conduct is egregious; (iii) the egregious conduct is directed at the plaintiff; and (iv) the defendant’s conduct is part of a pattern directed at the public generally. Conocophillips v. 261 E. Merrick Rd. Corp., 428 F.Supp.2d 111, 129 (EDNY 2006).
2. In New York, certain fraudulent conduct may also earn punitive damages, i.e. fraud with “evil and reprehensible motives.” Solutia Inc. v. FMC Corp., 456 F.Supp.2d 429, 453 reconsideration denied (SDNY 2006).
3. Contracts commonly exclude all incidental, indirect, and consequential damages subject to certain exceptions; punitive damages may be expressly excluded.
III. DISCLAIMERS/LIMITATIONS OF WARRANTY
Are disclaimers of any and all implied warranties enforceable in New York?
Yes. Regarding all issues concerning implied warranties, New York adopted UCC § 2-316, which states that all implied warranties may be disclaimed. However, such disclaimers must use contract language that is commonly understood to call a buyer's attention to the exclusion of warranties. Expressions like "as is" or "with all faults" suffice, per the UCC, to adequately warn buyers and, thus, establish warranties.
For the two most prevalent implied warranties—those of merchantability and fitness—New York and the UCC permit sellers to disclaim:
(A) the implied warranty of merchantability, as long as the disclaimer is:
(i) conspicuous, and
(ii) explicitly includes the word “merchantability.”
(B) the implied warranty of fitness as long as such disclaimer is
(i) "affected by a writing," and
Drafters should note, however, that the UCC places a limitation on these disclaimers: they’re valid “unless the circumstances indicate otherwise.” Meaning, if the facts indicate that a warranty did exist—perhaps as a deciding factor in the subject sale of goods—regardless of what the contract purports to disclaim, a warranty may exist. Also noteworthy is the UCC § 2-316’s dictate that “an implied warranty can also be excluded or modified by course of dealing or course of performance or usage of trade.” Although these are likely tougher to prove than black and white ink on a contract is to read.
IV. DISPUTE RESOLUTION
When the State of New York is sued over a contract dispute, does New York mandate any dispute resolution procedures such as venue requirements or jury trial requirements?
No. The Court of Claims has jurisdiction over contract dispute claims brought against the State of New York and certain State-related authorities. Rather, to serve New York with a suit for breach of contract, a claim must be delivered to a New York Assistant Attorney General at an office of the Attorney General within six months after the claim’s accrual. The claim's venue is determined by the county where the claim accrued.