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Will intentional wrongdoing render the limitation of liability provision unenforceable?
February 2, 2018
Will intentional wrongdoing render the limitation of liability provision unenforceable?
    The answer to the question is yes, but framing the question may be easier than applying the principle.  Intentionally breaching a contract is not the same as intentional wrongdoing.  If the breach has some economic or legitimate purpose - other than to render harm to the non-breaching party - a limitation of liability provision should be enforced.  Applying these principles to the alarm industry, if you decide to stop service, let your customer know, and then the customer suffers a loss, your contractual limitation of liability should be enforced - providing of course that the contract and provision is properly written and properly executed.  If you perform your contractual duties in such a negligent manner that a judge could conclude that you simply didn't care what harm came to your customer, then expect that your contractual limitation will not be enforced.
    Electronic Trading sued Morgan Stanley for failing to market and develop software and systems for an alternate trading system under an exclusive license agreement.  For purposes of a motion Morgan Stanley admitted it breached the agreement and performed no services, but argued that the Limitation of Liability provision in their agreement limited damages, which Morgan Stanley agreed to pay.  The question before the court on a motion was whether the facts were sufficiently alleged to establish intentional wrongdoing so as to render the limitation of liability provision unenforceable.
    The limitation of liability provision in the agreement 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.” and further provides that “[t]he parties acknowledge that these limitations of liability and exclusions of potential damages were an essential element in setting consideration under this agreement".
    The court noted:
    "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” cite omitted.

    However, such clauses are unenforceable when,
    “[i]n 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” cites omitted"
    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’ ” cites omitted.   Stated otherwise, a party can intentionally breach a contract to advance a “legitimate economic self-interest” and still rely on the contractual limitation provision. cite omitted."  Supreme Court, Appellate Division, First Department, New York.  ELECTRON TRADING, LLC, Plaintiff–Appellant, v. MORGAN STANLEY & CO. LLC, Defendant–Respondent.  4858  Index 651370/15 ENTERED: JANUARY 23, 2018


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Ken Kirschenbaum,Esq
Kirschenbaum & Kirschenbaum PC
Attorneys at Law
200 Garden City Plaza
Garden City, NY 11530
516 747 6700 x 301
516 747 6700