Ew, Gross (Negligence)
During a recent contract negotiation, opposing counsel to the service provider objected to excluding gross negligence and willful misconduct from the disclaimer of consequential damages and the damages cap. His reasoning was that “no one really knows what these terms mean” and they’re “too fudgy.” While I believe this was mostly a negotiation tactic, it got me thinking how defined these terms really are.
Different states (and their common law precedent) define gross negligence differently. For instance, the standard in North Carolina “consists of wanton conduct done with conscious or reckless disregard for the rights and safety of others. An act is wanton when it is … done needlessly, manifesting a reckless indifference to the rights of others.” Trillium Ridge Condo. Ass’n. v. Trillium Links & Vill., LLC, 236 N.C. App. 478, 490 (2014). In New York, to constitute gross negligence, a party’s conduct must “smack[] of intentional wrongdoing” or “evince[] a reckless indifference to the rights of others.” Ryan v. IM Kapco, Inc., 88 A.D.3d 682, 683 (2011). “Stated differently, a party is grossly negligence when it fails ‘to exercise even slight care’ or ‘slight diligence.’” Id. In Texas, “[g]ross negligence consists of both objective and subjective elements. Plaintiffs must prove … that 1) when viewed objectively from the defendant’s standpoint at the time of the event, the act or omission involved an extreme degree of risk, considering the probability and magnitude of the potential harm to others and 2) the defendant had actual, subjective awareness of the risk involved, but nevertheless proceeded with conscious indifference to the rights, safety, or welfare of others.” U-Haul Intern., Inc. v. Waldrip, 380 S.W.3d 118, 137 (Tex. 2012). Other states have similar standards.
The commonalities between these standards are a recklessness or conscious indifference. In my criminal law class in school, the professor provided an example of recklessness (albeit in the criminal, not civil, context) as firing a gun into a home that you know is occupied. You may not know where the people are, and you aren’t actually trying to hit anyone, but you’re aware that it’s a distinct possibility and serious injury could occur. But note that the New York standard also starts to feel a little more like willful misconduct, with conduct that “smacks of intentional wrongdoing.”
Are the differences between the state standards meaningful? I don’t know. At trial, all of the elements of the standard must be proven, and the arguments and evidence used to show such elements must be tailored to the standard. But does this matter during contract negotiations? Probably not. I have a hard time believing that a company would be ok with one standard, but not another. For instance, I cannot imagine a company stating that consequential damages and no damages cap would be acceptable for actions that manifest a reckless indifference to the rights of others, but NOT acceptable for actions for which the defendant has awareness of the risks involved, but proceeds with conscious indifference. Even the New York standard that references an intent element should not be an issue (because if a company should be liable for gross negligence, they should also be liable for any willful misconduct).
And the story is similar for willful misconduct. New York defines willful misconduct as “a failure to use even slight care, or conduct that is so careless as to show complete disregard for the rights and safety of others.” Mc Duffie v. Watkins Glen Intern., Inc., 833 F. Supp. 197, 203 (W.D.N.Y. 1993). In California, “[w]illful misconduct involves more than a failure to use ordinary care; it involves a more positive intent actually to harm another or to do an act with a positive, active, and absolute disregard of its consequences.” Carter v. Prime Healthcare Paradise Valley LLC, 198 Ca. App. 4th 396, 412 (2012). In Texas, “a plaintiff can show that a defendant is liable for willful misconduct if the evidence establishes that the defendant intentionally or deliberately engaged in improper behavior or mismanagement, without regard for the consequences of his actions or omissions.” Apache Corp. v. Castex Offshore, Inc., 626 S.W.3d 371 (Tex. Ct. App. 2021).
The New York definition looks a lot like gross negligence, with its absence of an intent requirement. And while the Texas definition, the intent appears to be directed more towards improper behavior or mismanagement, not the harmful result, itself with a standard similar to gross negligence. On the other hand, California requires a “positive intent to actually harm another.”
But again, does it matter? Do these differences between state standards, which appear to be greater than for gross negligence, really matter? If the parties accept that gross negligence will also be excluded from consequential damages and the damages cap, then probably not. Whether something is gross negligence or willful misconduct means little when each are carved out from the limitations of liability provision. However, in instances (which I have found to be exceedingly rare) where willful misconduct IS excluded from the limitations of liability, but gross negligence is NOT, this could make a difference.
So what to do? One option is to argue that even when the definition may not be crystal clear at the time of negotiation, it is what it is and the parties can sort that out in court. It’s a standard to be evaluated like any other court-bound issue. Another option (which is what I opted for in my negotiation) was to actually define the terms. Pick a starting point and negotiate the specific definition. The benefit of this approach is predictability. The parties can discuss what the actual definition is and tweak it as appropriate. This is also beneficial because that standard won’t change over time (unless common law). The drawback is that precedent becomes less valuable, for each party. With a standard different from that settled on by courts, the cases that have relied on that court-approved definition become less relevant. No longer can a party show that certain conduct has been (or has not been) found by courts to constitute gross negligence or willful misconduct, as an argument why their similar (or the same) conduct likewise does (or does not) constitute gross negligence or willful misconduct. Instead, each party must simply apply the facts to the standard, in hopes that the jury agrees.
This was the first time in my practice where this issue came up, and hopefully it will be the last. It was clear from the negotiations that the intent of the counsel’s argument was simply to prevent his client from having uncapped damages for reckless behavior. While some discussion may have been warranted, this was this hill he was willing to die on. Which to me, is just gross.