In U.S. commercial contracts, limitation of liability (LoL) clauses are common tools used to cap or exclude certain types of damages between businesses. However, U.S. courts generally will not enforce an LoL clause in cases of gross negligence or willful misconduct, deeming such exclusions contrary to public policy. The treatment of these clauses may differ in foreign jurisdictions, such as the UK, where enforcement can be more flexible.
Defining Gross Negligence and Willful Misconduct
Gross Negligence
This term refers to an extreme lack of care that demonstrates a reckless disregard for the safety or rights of others. Under New York law, gross negligence involves conduct that shows a “failure to use even slight care” or actions “so careless as to show complete disregard for the rights and safety of others.”
Willful Misconduct
Willful misconduct refers to intentional actions—or deliberate failures to act—taken with the knowledge that such conduct will likely result in harm or damage. In New York, this is characterized by actions taken with a “reckless indifference to the rights of others,” signaling a deliberate disregard for a known risk.
Case Study: The CrowdStrike Incident
A recent example illustrating the challenges of LoL clauses involves CrowdStrike, a cybersecurity firm. In July 2024, a faulty software update from CrowdStrike caused a global IT outage, severely impacting businesses, including Delta Air Lines. Delta claimed losses of approximately $500 million, accusing CrowdStrike of gross negligence and willful misconduct.
Delta argued that these allegations voided the liability limitations in their contract, while CrowdStrike maintained that its LoL clause was enforceable and denied the accusations of gross negligence or willful misconduct.
It is important to note that courts rarely classify software errors like those in the CrowdStrike incident as rising to the level of gross negligence or willful misconduct. Such findings typically require a much higher threshold of proof, involving clear evidence of reckless or intentional harm.
Key Takeaway
While LoL clauses are essential in managing risk in business contracts, they are not a catch-all solution.
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