U.S. Third Circuit Court of Appeals Holds Exculpatory Clause Enforceable

Commercial Contracts: A fundamental principle of contract law is the public policy of freedom of contract: the idea that individuals should be permitted to bargain freely amongst themselves. Under this legal doctrine, courts will generally uphold the majority of contract provisions, including those which would limit or completely eliminate liability for one party. Such liability-limiting provisions are referred to as exculpatory clauses. In a recent decision, Wartsila NSD North America, Inc. v. Hill International, Inc., the United States Court of Appeals for the Third Circuit gave credence to these deep-rooted principles of contract law.

In Wartsila, the parties had entered into a written consulting agreement whereby the defendant would provide consulting services for the plaintiff in connection with the construction of a power plant. The agreement also contained an exculpatory clause (a clause that disclaims liability in advance), which stated that the defendant would not be liable to the plaintiff for any lost, delayed or diminished profits, revenues or opportunities or any other incidental, special, indirect or consequential damages resulting from the defendant’s performance or failure to perform the services under the agreement.

When the project was not completed on time and a senior consultant on the project was found to have overstated his credentials, the plaintiff sued defendant to recoup the losses it sustained as a result. However, the Court found the broad exculpatory clause to be valid and enforceable, reasoning that the public policy of freedom of contract would be best served by enforcing the terms of the parties’ agreement, including that clause.

In reaching its holding, the Court also noted that none of the defenses under which the exculpatory clause should be disregarded were applicable. Specifically, the Court found that (a) the defendant had not committed fraud; (b) there was no evidence of undue influence or unequal bargaining power; (c) the “public interest” exception did not apply; and (d) the clause did not deprive the plaintiff of the entire benefit of the contract. As none of these justifications would apply, the exculpatory clause was held to be valid and enforceable.

This case highlights the importance of careful review in drafting and executing agreements. Exculpatory clauses can be valuable tools for limiting one party’s liability, but they can also severely impair the other party’s ability to recoup its losses. This case also articulates potential arguments for overcoming the limits of an exculpatory clause. Therefore, even if a contract includes such a clause and a dispute arises, the underlying facts should be carefully examined before concluding that recovery may be foreclosed.

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