Importance Of Carefully Drafted Provisions Limiting Damages

Author:Mr Tom Sullivan
Profession:Morgan Lewis

Contractual provisions limiting the types of damages that are available in the event of a breach, i.e. "limitation-of-liability provisions," are common in various types of commercial contracts. Such provisions may be useful in shielding a breaching party from significant liability, but their prevalence may cause some lawyers to view them as "mere boilerplate." Global Crossing Telecomms., Inc. v. CCT Commc'ns, 46 B. R. 97 (Bankr. S.D.N.Y. 2011), however, underscores that these provisions are not automatically enforced and are subject to certain exceptions. In light of this ruling, attorneys may want to consider several issues when drafting these provisions.

Global Crossing involved a dispute between Global Crossing Telecommunications, Inc. (Global Crossing) and CCT Communications, Inc. (CCT), two common carriers of telecommunication services. Id. at 102. The dispute arose out of a closely negotiated contract under which Global Crossing agreed to provide services to CCT; CCT, in turn, resold the services to retail customers. Id. Under the terms of the contract, Global Crossing charged CCT a flat monthly fee for calls to some destinations and a per-minute charge for calls to other destinations. Under this arrangement, Global Crossing had to "eat," or absorb, certain costs of international calls on the monthly fee plan that terminated in certain international areas. Id. This program became too costly and Global Crossing purported to terminate the agreement. CCT counterclaimed, seeking damages for breach of contract among other claims. Id. at 103.

The court began by analyzing whether contractual clauses limiting liability are enforceable. The contract contained the following damages provision:

Exclusion of Consequential Loss: In no circumstances shall either we or you be liable for indirect, consequential, reliance, or special loss or damages or for lost revenues, lost savings, lost business opportunity or lost profits of any kind.

Id. at 102 (emphasis added).

The court held that the damages limitation provision was enforceable under New York law and reflected an allocation of risks between sophisticated parties in an arm's-length transaction. Id. at 115. Parties may agree to limit their respective damages remedies under New York law (and under many other states' laws), except in the case of gross negligence or willful misconduct. Id. The court found that Global Crossing's conduct did not constitute willful misconduct because it was driven by "economically motivated...

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