Defining gross negligence in a contract — and why

Proof of gross negligence can negate a limitation of liability or an indemnity clause

In contract disputes, the concept of gross negligence normally comes into play in connection with risk-shifting provisions, such as:

• a limitation of liability clause;
• an indemnity obligation
• a clause exculpating a party from liability for its own future actions or omissions.

Such risk-shifting provisions sometimes include an exception (commonly ref­erred to as a carve-out) for cases in which gross negligence is proved.

For example, a limitation clause that caps a vendor’s liability for damages at a stated dollar amount might state that the vendor’s liability would be un­lim­it­ed if the vendor were shown to have been grossly negligent.

As discussed below, even if a contract didn’t itself contain a carve-out for gross negligence, a court might disregard a limitation of liability, an in­dem­ni­ty clause, etc., if the party claiming the benefit of the limitation or indemnity were shown to have engaged in gross negligence.

But there’s a problem, though, that can complicate the task of contract nego­ti­a­tion: Different states seem to define gross negligence differently — and many foreign jurisdictions apparently don’t even recognize the concept.

The loose California definition of gross negligence

The California Supreme Court, in its 2007 Janeway opinion, extensively re­viewed case law from a variety of states. It joined what it called the maj­or­i­ty view in holding that advance releases of liability in cases of gross negligence were unenforceable as being against public policy. See City of Santa Barbara v. Janeway, 161 P.3d 1095 (Cal. 2007) (affirming judgment of court of appeal that contractual release language did not shield from allegation of gross neg­li­gence in drowning death of disabled teen-ager at city pool).

Most notably for our purposes here, the Janeway court restated a key def­in­i­tion: “Gross negligence long has been defined in California and other jur­is­dic­tions as either a want of even scant care or an extreme departure from the ord­in­a­ry standard of conduct.” Id., slip op. at 6 (internal quo­ta­tion marks and citations omitted, emphasis added).

Under this definition of gross negligence, it’s not hard to imagine how a judge might rule that the “scant care” and “extreme departure” questions must be decided by a jury, and therefore refuse to grant summary judgment that, say, a limitation-of-liability clause applied.

The stricter New York definition

In contrast, New York law seems to provide a brighter-line definition of gross negligence — without going as far as the Texas definition also discussed below — and thus arguably makes it easier for parties to predict whether a limitation of liability or other risk-shifting provision would be pierced.

The definition of gross negligence in the text below is therefore drawn from New York law, and more specifically, from the opinions of the New York Court of Appeals, the state’s highest court, in Sommer v. Federal Signal Corp., 79 N.Y.2d 540, 554 (1992) (affirming reversal of summary judgment in favor of defendants).

• In Sommer, the court of appeals said that “[g]ross negligence, when invoked to pierce an agreed-upon limitation of liability in a commercial contract, must smack of intentional wrongdoing …. It is conduct that evinces a reckless indifference to the rights of others ….” 79 N.Y.2d at 554 (emphasis added, internal quotation marks and citations omitted). (The court also noted that the piercing effect “applies equally to contract clauses purporting to exonerate a party from liability and clauses limiting damages to a nominal sum.” Id.)
• The following year, in Colnaghi U.S.A. v Jewelers Protection Servs., 81 N.Y.2d 821 (1993), the same court of appeals reversed a lower court and granted summary judgment in favor of an alarm comp­a­ny that had been sued by an art gallery, from which burglars had stolen 20 paintings. The court stated that the alarm company’s failure to wire a skylight — even if falling “far below professional standards and customary practice in the industry” — did not rise to the level of culpability required to pierce the cont­ract’s exoneration of the alarm company from accusations of neg­li­gence. See 81 N.Y.2d at 823. (For a survey of some fact patterns where a court dist­in­guished gross neg­li­gence from ordinary negligence, see Thomas J. Hall, The Public Policy Exception To The Enforceability Of Damage Waiver Clauses (2008).)

Other states’ definitions aren’t as clear

Not every state’s law will require a court to pierce a risk-shifting provision upon a showing of gross negligence. For example, Texas cases are unclear on the question; compare —

• Valero Energy Corp. v. M.W. Kellogg Constr. Co., 866 S.W.2d 252, 257 (Tex. App. –Corpus Christi 1993) (affirming summary judgment in favor of defendants; waiver and indemnity provision abs­olv­ing defendant of all liability for products liability and gross negligence, in a contract be­tween two sophisticated companies represented by counsel, did not offend public policy); with
• Smith v. Golden Triangle Raceway, 708 S.W. 2d 574 576 (Tex. App. –Beaumont 1986) (reversing summary judgment in favor of defendant; term in a release attempting to exempt raceway owner from liability or damages occasioned by gross negligence was against public policy).

As a matter of interest, the Texas Civil Practices and Remedies Code’s chap­ter on damages defines gross negligence as

… an act or omission:

(A) which when viewed objectively from the standpoint of the actor at the time of its oc­cur­rence involves an extreme degree of risk, considering the probability and magnitude of the potential harm to others; and

(B) of which the actor has actual, subjective awareness of the risk in­volved, but nev­er­the­less proceeds with conscious indifference to the rights, safety, or welfare of others.

Tex. Civ. Prac. & Rem. Code § 41.001(11) (emphasis added); see generally U-Haul Int’l, Inc. v. Waldrip, No. 10-0781, slip op. at 30 (Tex. Aug. 30, 2012) (reversing punitive-damages award against U-Haul; citing statute and explaining “objective” and “subjective” elements of gross-negligence test). This statutory definition of gross negligence would seem to make it even easier for a defendant to obtain summary judgment dismissing a gross-negligence claim, but some might argue that it goes too far in that direction.

Incidentally, in that chapter of the Texas statute, the definition of gross neg­li­gence is used only in stating one of the possibilities for recovering of ex­emp­la­ry damages, a.k.a. punitive damages; it’s not known what effect a court would give to that definition in assessing a risk-shifting provision. See gen­er­al­ly Legal Opinions Committee of the Business Law Section of the State Bar of Texas, Legal Opinions Committee Statement on Legal Opinions regarding indemnification and exculpation provisions under Texas law (2006).

Foreign countries might not distinguish between negligence and gross negligence

The interpretation and enforcement of a contract might be affected by the fact that some non-U.S. jurisdictions apparently have not settled on a view whe­ther gross negligence can be distinguished from ordinary negligence. See, e.g., Peter Church, When does negligence become gross negligence? (2011) (UK); Gavin Witcombe, Did you know… what gross negligence is? (2006) (Australia); Liam Brown, Gross negligence in exclusion clauses: is there an intelligible difference from ordinary negligence (2005) (Australia).

Contractually defining gross negligence

In working on the general-definitions chapter of the Common Draft contract form book, it occurred to me to include an (optional) agreed definition of gross negligence. Here’s the current draft:

Unless applicable law clearly requires otherwise, the term gross neg­li­gence, whether or not capitalized, refers to conduct that evinces a reckless disregard for or indifference to the rights of others, smacking of intentional wrongdoing; it differs in kind, not only degree, from ordinary negligence.

This definition is akin to the fairly-restrictive New York standard discussed above, in contrast to the arguably-fuzzier and more plaintiff-friendly California standard, while not going as far as the very-restrictive Texas standard.

A U.S. court might well disregard such a contractual definition of gross neg­li­gence. It might instead apply whatever definition the court deemed to be required by applicable law.

But there would seem to be at least a chance that a court might hold that public policy did not bar the parties from agreeing to their own definition of gross negligence.

A contractual definition of gross negligence might therefore be helpful or even essential to determining whether a risk-shifting clause should be pierced.

So all in all, including a definition of gross negligence in a contract is probably worth the effort.

[UPDATE: There’s a discussion going about this definition at Ken Adams’s Koncision blog.]