Commercial Division Blog
Posted: January 31, 2018 / Categories Commercial, Damages
Claims Barred Above Amount Set by Limitation of Liability Provision
On January 23, 2018, the First Department issued a decision in Electron Trading, LLC v. Morgan Stanley & Co. LLC, 2018 NY Slip Op. 00380, holding that certain claims were barred by a limitation of liability provision, explaining:
The limitation of liability provision in the ELA provides, in pertinent part, that "neither party's total liability under this agreement will exceed the total amounts previously paid by defendant to plaintiff under this agreement and the CSA prior to the date of the applicable claim." The CSA contains a similar provision. The ELA provides that "the parties acknowledge that these limitations of liability and exclusions of potential damages were an essential element in setting consideration under this agreement".
It was not error for Supreme Court to rule on the enforceabilty of the liability limitation provision, although it is an affirmative defense, on a motion to dismiss. In the ordinary course of deciding motions, courts consider whether documentary evidence establishes an asserted defense, in this case a defense concerning the limitation of liability provisions in the parties' contracts.
New York courts routinely enforce such liability-limitation provisions, especially when negotiated by sophisticated parties. The Court of Appeals has recognized that a limitation on liability provision represents the parties' Agreement on the allocation of the risk of economic loss in the event that the contemplated transaction is not fully executed, which the courts should honor. The parties may later regret their assumption of the risks of non-performance in this manner, but the courts let them lie on the bed they made.
However, such clauses are unenforceable when,
in contravention of acceptable notions of morality, the misconduct for which it would grant immunity smacks of intentional wrongdoing. This can be explicit, as when it is fraudulent, malicious or prompted by the sinister intention of one acting in bad faith. Or, when, as in gross negligence, it betokens a reckless indifference to the rights of others, it may be implicit.
The type of intentional wrongdoing that could render a limitation in a contract unenforceable is that which is unrelated to any legitimate economic self-interest. Stated otherwise, a party can intentionally breach a contract to advance a legitimate economic self-interest and still rely on the contractual limitation provision.
Plaintiff contends that defendant's insistence that it allow the ATS to be used for the benefit of HFTs impermissibly exceeded the contemplated scope of the ELA and CSA. However, the ELA gave defendant discretion to modify the ATS, and neither agreement refers to "dark pools" or protection from predatory HFTs. Thus, in demanding that plaintiff permit use of the ATS by HFTs, defendant was not seeking any benefit that was in conflict with what it was entitled to under the agreement.
Plaintiff's broad allegations that defendant insisted that plaintiff undertake acts constituting securities fraud as a precondition to defendant's performance under the parties' contracts does not meet the heightened pleading requirements for fraud. Although the allegations globally raise issues that have recently come under legal scrutiny about how HFTs operate within dark pools, the complaint is devoid of specific factual instances of fraud by defendant. Plaintiff also fails to provide any explanation of how defendant's alleged acts actually violate the securities laws. Without more, the factual allegations in the complaint are insufficient to avoid the liability-limitation provisions in the parties' agreements. At most, the allegations support a claim of intentional breach, which is insufficient to void the limitation of liability provision.
A key element in commercial litigation is calculating damages. Contract clauses limiting damages are common and how they are enforced can make a big difference in whether, and if so, how, you litigate an action. Contact Schlam Stone & Dolan partner John Lundin at email@example.com if you or a client have questions regarding a contractual damages limitation clause.