Parties negotiate “limitation of liability clauses” in contracts to put a cap on what they might ultimately owe in the event they fail to comply with their obligations under an agreement. For example, a consultant’s contract might provide that, if the consultant breaches the agreement, the most it will owe to an aggrieved party is $50,000.00. These limitation of liability clauses can be a useful tool when parties consider entering into commercial agreements, especially on large projects, where a breach of the agreement might otherwise result in significant financial exposure. However, under certain circumstances, these limitation of liability clauses can be invalidated.
Under Ohio common law, limitation of liability clauses may be invalidated with proof of “willful or wanton misconduct.” However, the Supreme Court of Ohio opined that, historically, the terms “willful” and “wanton” have been confused with “reckless,” although each of these terms reflect unique standards of care.
So, what did the Supreme Court mean when it opined that willful or wanton conduct could invalidate a limitation of liability clause in its 1978 Berjian decision? Did it really mean “willful” and “wanton,” as those terms are currently used? Or, was the Berjian case one in which the Court conflated the “willful,” “wanton,” and “reckless” standards? As such, can reckless conduct – the most relaxed of the standards – also invalidate a limitation of liability clause?
As set forth more fully below, it is not yet clear whether reckless conduct may invalidate a limitation of liability clause. However, parties can account for this unsettled point of law by discussing it during contract negotiations and/or by addressing it with insurance providers.
In Ohio, limitation of liability clauses may be invalidated with proof of “willful or wanton misconduct.” Richard A. Berjian, D. O., Inc. v. Ohio Bell Tel. Co., 54 Ohio St.2d 147, 158, 375 N.E.2d 410, 416 (1978). That is, “[a]lthough a limitation-of-liability clause for damages caused by one's own negligence may be valid and enforceable, it is ineffective where the party to the contract seeking protection under the clause has failed to exercise any care whatsoever toward those to whom he owes a duty of care.” Id.
Later, in Anderson, the Supreme Court of Ohio acknowledged the differences between the “willful,” “wanton,” and “reckless” standards of care. Anderson v. Massillon, 134 Ohio St.3d 380, 2012-Ohio-5711, 983 N.E.2d 266, ¶¶ 3; 31-34 (2012). Crucially, the Court stated:
Given the cross-application of these terms in our case law, it is not surprising that Ohio appellate courts have reached the conclusion that the ‘willful,’ ‘wanton,’ and ‘reckless’ standards are ‘functionally equivalent.’ …
However, as the historical development of these terms in our jurisprudence demonstrates, ‘willful,’ ‘wanton,’ and ‘reckless’ describe different and distinct degrees of care and are not interchangeable.
Id. at ¶¶ 30-31. In short, the Anderson Court noted, “[a]dmittedly, these degrees of care have been confused, but they have different meanings, involve different degrees of culpability, and are not interchangeable.” Id. at ¶ 3.
Specifically, the Anderson Court set forth the following lines of demarcation with regards to the differing standards of care:
• Willful conduct implies an intentional deviation from a clear duty or from a definite rule of conduct, a deliberate purpose not to discharge some duty necessary to safety, or purposefully doing wrongful acts with knowledge or appreciation of the likelihood of resulting injury. Tighe v. Diamond, 149 Ohio St. at 527, 80 N.E.2d 122; see also Black's Law Dictionary 1630 (8th Ed.2004) (describing willful conduct as the voluntary or intentional violation or disregard of a known legal duty).
• Wanton conduct is the failure to exercise any care toward those to whom a duty of care is owed in circumstances in which there is great probability that harm will result. Hawkins, 50 Ohio St.2d at 117–118, 363 N.E.2d 367; see also Black's Law Dictionary 1613–1614 (8th Ed.2004) (explaining that one acting in a wanton manner is aware of the risk of the conduct but is not trying to avoid it and is indifferent to whether harm results).
• Reckless conduct is characterized by the conscious disregard of or indifference to a known or obvious risk of harm to another that is unreasonable under the circumstances and is substantially greater than negligent conduct. Thompson, 53 Ohio St.3d at 104–105, 559 N.E.2d 705, adopting 2 Restatement of the Law 2d, Torts, Section 500, at 587 (1965); see also Black's Law Dictionary 1298–1299 (8th Ed.2004) (explaining that reckless conduct is characterized by a substantial and unjustifiable risk of harm to others and a conscious disregard of or indifference to the risk, but the actor does not desire harm).
In coupling the analysis of Berjian and Anderson, the following question is presented: what did the Berjian Court mean when it ruled that willful or wanton conduct could invalidate a limitation of liability clause? Was the Berjian case one where the Court used the three standards of care interchangeably? As such, did the Berjian Court really mean that “the conscious disregard of or indifference to a known or obvious risk of harm to another that is unreasonable under the circumstances and is substantially greater than negligent conduct” could invalidate a limitation of lability clause? The law remains unclear.
Importantly, this inquiry is not merely an academic exercise. Ohio federal courts have indicated reckless conduct does render a limitation of liability clause unenforceable. See Nahra v. Honeywell, Inc., 892 F.Supp. 962, 969 (N.D.Ohio 1995) (citing Berjian for the proposition that a limitation of liability clause will be upheld absent a willful or reckless breach); Solid Gold Jewelers v. ADT Sec. Sys., Inc., 600 F. Supp. 2d 956, 959 n.2 (N.D. Ohio 2007) (citing Nahra for the proposition that limitations on liability are upheld absent a willful or reckless breach); Superior Integrated Solutions, Inc. v. Reynolds and Reynolds Co., No. 3:09-cv-314, 2009 WL 4135711, at *3 (S.D. Ohio Nov. 23, 2009) (citing Solid Gold and stating that a reckless breach is considered willful misconduct that would invalidate a limitation of liability clause); Transcon. Ins. Co. v. Simpiexgrinnetl LP, No. 3:05CV7012, 2306 WL 2035571, at *5 (N.D. Ohio July 18, 2006) (citing Nahra and Berjian for the proposition that limitation of liability clauses will be upheld absent a willful or reckless breach); Purizer Corp. v. Battelle Mem'l. Inst., No. 01 C 6360, 2002 WL 22014, at *5 (N.D. Ill. Jan. 7, 2002) (same).
In fact, the Southern District of Ohio certified this very question to the Supreme Court of Ohio in Am. Mun. Power, Inc. v. Bechtel Power Corp., S.D.Ohio No. 2:11-CV-131. The Court accepted the question, held oral arguments, and ultimately declined to opine on the matter. And although the Am. Mun. Power, Inc. Plaintiff filed an interlocutory appeal to the United States Sixth Circuit Court of Appeals, the case settled before the Sixth Circuit could weigh in. Again, the law remains unsettled.
Given this uncertainty, parties may wish to address all three standards when drafting limitation of liability clauses and/or discuss the issue with insurance providers. Indeed, due to the relative malleability of the recklessness standard, a number of parties could open themselves up to unforeseen liability by failing to address this point.
NOTE: This general summary of the law should not be used to solve individual problems since slight changes in the fact situation may require a material variance in the applicable legal advice.