Will Louisiana enforce this clause limiting or excluding our liability, including a consequential-damages exclusion?
Yes, for ordinary fault, but never in advance for intentional or gross fault, or for physical injury. Civil Code art. 2004: "Any clause is null that, in advance, excludes or limits the liability of one party for intentional or gross fault that causes damage to the other party. Any clause is null that, in advance, excludes or limits the liability of one party for causing physical injury to the other party." The Louisiana Supreme Court applied art. 2004 to a genuinely commercial dispute (a mineral-exploration agreement's consequential-damages exclusion), in Olympia Minerals, LLC v. HS Resources, Inc., and the case shows the bar for defeating such a clause is HIGH: after the lower courts voided the clause on a finding of "bad faith" under art. 1997 (a related article the Court read together with art. 2004), the Supreme Court reversed, holding "Accordingly, and contrary to the lower courts' holdings, the agreement's prohibition against consequential damages is enforceable," because the record did not establish malice: the Court, noting it "has never stated what constitutes bad faith under La. C.C. art. 1997," took its definition from the article's revision comment (b) ("[a]n obligor is in bad faith if he intentionally and maliciously fails to perform his obligation"), and found the breaches, though "conscious and calculated business decisions" in the trial court’s words, were not "maliciously made." Enforceable did not mean cost-free, and that is the half the case is usually cited without: the Court went on to hold that "The agreement’s prohibition against consequential damages is not, however, the all-encompassing shield from every amount of damages imposed by the lower courts", and because a complete seismic survey "was one of the benefits of a bargain", "damages for failure to conduct the survey cannot fairly be characterized as consequential". It left that award standing, amended only for a typographical error, at $4,125,000.
The trap
Olympia Minerals is the trap in both directions. First, do not assume ordinary carelessness, a poor business decision, or even a party's own "conscious and calculated" choice to breach defeats a limitation-of-liability or consequential-damages clause under art. 2004: the trial court in Olympia Minerals found the breaching party's decisions were "conscious and calculated business decisions," not negligent ones, and the Supreme Court STILL reversed the finding of bad faith, holding actual malice (an intentional and malicious failure to perform) is required, not merely intentional conduct that happens to breach the contract. Second, do not assume art. 2004 is toothless just because the bar is high: the article's own text is not limited to gross negligence in the tort sense: it reads "intentional or gross fault", which is two grounds and not one, so intentional fault stands beside gross fault, and a clause that in advance purports to excuse a party's own deliberate, bad-faith non-performance remains null regardless of how the clause is worded. Third, art. 2004's second sentence (voiding any advance exclusion of liability for causing PHYSICAL INJURY) is a freestanding, distinct rule from the intentional-or-gross-fault sentence and applies even to ordinary-negligence-caused physical injury; a clause validly limiting commercial/economic liability under the first sentence's ordinary-fault carve-out gets no protection at all if the harm in question is bodily injury. Fourth, winning the art. 2004 and art. 1997 argument is not the end of the exposure. A consequential-damages exclusion excludes only consequential damages, and whether a particular loss is consequential is a separate fight the clause does not settle: in Olympia Minerals the clause was upheld and the defendant still paid over four million dollars, because the damages for the survey it never performed were a direct benefit of the bargain rather than a consequence of breaching it. Name the excluded categories, or the clause will be read against a court's own characterisation of the loss.
9 authorities
- statuteLa. Civ. Code art. 2004enactment date not established
The words that state the rule
Any clause is null that, in advance, excludes or limits the liability of one party for intentional or gross fault that causes damage to the other party. Any clause is null that, in advance, excludes or limits the liability of one party for causing physical injury to the other party.
The words that state the rule
Accordingly, and contrary to the lower courts’ holdings, the agreement’s prohibition against consequential damages is enforceable.
The words that state the rule
The district court cited two reasons for triggering Articles 2004 and 1997. Specifically, the district court cited “the two major breaches of the [agreement] by defendants (failure to lease the minimum acreage and failure to complete the [seismic] survey) were not the result of negligence, unforeseen events, or even a lack of ability. These were conscious and calculated business decisions.
- statuteLa. Civ. Code art. 1997enactment date not established
The words that state the rule
An obligor in bad faith is liable for all the damages, foreseeable or not, that are a direct consequence of his failure to perform.
The words that state the rule
Apparently, this court has never stated what constitutes bad faith under La. C.C. art. 1997, so our review is guided by revision comment (b) to article 1997, which indicates that “[a]n obligor is in bad faith if he intentionally and maliciously fails to perform his obligation.” Thus, according to this comment, there are both intentional and malicious components to bad faith.
The words that state the rule
While not excusing Aspect Resources’ failure to perform its survey obligation, we do not find that failure was maliciously made.
The words that state the rule
The agreement’s prohibition against consequential damages is not, however, the all-encompassing shield from every amount of damages imposed by the lower courts, as Aspect Resources urges.
The words that state the rule
Because a complete survey was one of the benefits of a bargain, under which El Paso agreed to keep its mineral interests off the market for a year, damages for failure to conduct the survey cannot fairly be characterized as consequential. The $4,525,000 in damages awarded by the district court for the failure to conduct a complete seismic survey is consistent with the foreseeable results of Aspect Resources’ failure to complete the survey. Thus, this award was proper; however, because the parties have acknowledged that the written judgment contained a typographical error, we amend the judgment to reflect the amount of the award is $4,125,000.
The words that state the rule
We agree with the court of appeal, however, in pretermitting consideration of the merits of Olympia’s claims for attorneys’ fees. We find no error in the conclusion that Olympia did not properly raise this issue in the district court; and, like the court of appeal, we decline to reach this issue in the first instance in this court. AFFIRMED IN PART; REVERSED IN PART; AMENDED IN PART; AND REMANDED TO THE COURT OF APPEAL.
“Defective” means that reading found something to correct. What you are reading is the rule as it stands after that reading.