Civil Code 1668 Limitations of Liability
By Kendall Wilson
July 1, 2025
California Supreme Court: Contractual Limitations of Liability for Intentional Torts are Unenforceable
Limitations of liability are a common feature of commercial contracts. Broadly speaking, limitation of liability clauses seek to do just that: limit the liability of one or both contracting parties to a certain amount of damages, or certain types of damages, arising out of the contract. And while these kinds of contractual limitations are generally enforceable, California law has for many years restricted the enforceability of a contract clause that seeks to absolve a party from liability for its own fraudulent, willful, or illegal conduct. Specifically, California Civil Code § 1668 says that “all contracts which have for their object, directly or indirectly, to exempt any one from responsibility for his own fraud, or willful injury to the person or property of another, or violation of law, whether willful or negligent, are against the policy of the law.”
Clearly § 1668 would invalidate a contract clause that purports to entirely absolve a contracting party from any liability for its fraudulent, willful, or unlawful act. But over the years, courts applying § 1668 disagreed on whether it invalidates a contract clause that merely seeks to limit such liability. With no definitive California Supreme Court ruling on the issue, lower courts (and federal courts applying California law) reached differing conclusions.
Fraud, Intrigue, and Barbecue Sauce: New England Country Foods, LLC v. VanLaw Food Products, Inc.
Then in 2022, the Ninth Circuit Court of Appeals heard a truly fascinating case – at least, fascinating for anyone interested in business torts and barbecue sauce. In a nutshell, New England Country Foods had a “Bold and Smoky Kansas City Style Barbecue Sauce” that it sold to Trader Joe’s. After making the sauce in-house for many years, in 2015 it entered a contract with VanLaw Food Products to manufacture the sauce. And as you may have guessed, the agreement contained a clause limiting the parties’ liability, and stating that neither party would be liable for lost profits, indirect, special, or punitive damages, etc.
New England Country Foods alleges that, as their contract neared an end, VanLaw hatched a plan to copy the “Bold and Smoky” recipe and sell it directly to Trader Joe’s. (New England Country Foods discovered this plot when it uncovered emails between VanLaw’s president and Trader Joe’s in separate litigation involving – of all things – sriracha sauce).
New England’s lawsuit included claims seeking lost profits and punitive damages – damages that would be excluded under the parties’ limitation of liability clause. And its claims included not only breach of contract, but also the intentional torts of interference with contractual relations and interference with prospective economic relations. And so the question of whether § 1668 applied was squarely before the court. New England alleged “willful injury” to its property (its trade secrets and economic relations). Under the parties’ contract, VanLaw would not be completely absolved from liability for those intentional acts – but its liability would be limited to direct damages, and New England would not be permitted to recover lost profits or punitive damages.
The Ninth Circuit certified the question of § 1668’s applicability to the California Supreme Court: “Is a contractual clause that substantially limits damages for an intentional wrong but does not entirely exempt a party from liability for all possible damages valid under California Civil Code Section 1668?”
In April 2025, the California Supreme Court issued its decision: “No.” When it comes to “fraud, or willful injury to the person or property of another, or violation of law,” contractual limitations of liability of any kind are invalid, and parties are liable for all damages caused by their conduct – despite any contract language to the contrary.
What Does New England Country Foods Mean for Financial Institutions?
The supreme court’s decision has far-reaching implications for all commercial contracts subject to California law. For financial institutions dealing with consumer disputes, for example, financial institutions may see an increase in allegations of fraud or “violations of law,” such as consumer protection statutes – litigants and plaintiffs’ counsel may seek to capitalize on the court’s decision to leverage higher settlements, by pointing to the possibility of uncapped damages if intentional or illegal conduct is proven.
In the context of vendors and third-party contracts, California-based financial institutions may see an increase in vendors attempting to avoid application of California law altogether. For financial institutions involved in disputes or seeking termination of a contract with an under-performing vendor, this broad application of § 1668 potentially provides opportunities for negotiating leverage. Where a vendor reneges on specific promises, or engages in deceptive sales tactics, such conduct may constitute fraud, and thus may invalidate any purported limitation of liability. The prospect of uncapped damages in such a scenario may give financial institutions much-needed leverage in attempting to get out of a contract that otherwise is heavily drafted in favor of the vendor.
And if you happen to be grilling this upcoming Independence Day weekend, I highly recommend you head over to Trader Joe’s for some truly excellent Bold and Smoky Kansas City Barbecue Sauce. It’s the perfect way to enjoy baby back ribs and a bit of California legal history in one delicious bite.
About the Author
Kendall Wilson
Kendall Wilson is a Senior Associate Attorney at SW&M, bringing over 15 years of diverse legal experience to the firm. Kendall’s practice is centered on representing credit unions in a wide range of legal matters, including labor and employment issues, […]
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