[author: Kristie Tappan]
The California Court of Appeal recently determined that a contract clause limiting liability between parties was valid and prevented a food disinfection company from proceeding with its suit against a safety inspection company. Food Safety Net Services v. Eco Safe Systems USA, Inc., 147 Cal.Rptr.3d 634 (Cal. Ct. App. 2012). The case reaffirms parties’ ability to limit tort liability through contracts.
Eco Safe and Food Safety entered into a contract to test food disinfection equipment sold by Eco Safe. Eco Safe hired Food Safety to perform a “challenge study” that would compare Eco Safe’s ozone wash with a chlorine rinse to determine which did a better job of removing bacteria from lettuce and tomatoes. Food Safety applied three types of bacteria to lettuce and tomatoes and then washed the sets of vegetables. The study showed the ozone wash did a significantly better job of removing E. coli from lettuce, but there was no significant difference for tomatoes or the other bacteria. Eco Safe was unhappy with the test and refused to pay Food Safety. Food Safety sued for breach of contract, and Eco Safe then filed a counterclaim for breach of contract, negligence, fraud and related claims.
The trial court granted summary judgment in favor of Food Safety on the counterclaim, and the Court of Appeal affirmed. Eco Safe’s counterclaim failed because the parties’ contract limited Food Safety’s potential liability. The court found that the contract specifically excluded Food Safety’s liability to Eco Safe for indirect, incidental or special damages. The contract limited damages to direct damages suffered by Eco Safe or an amount equal to what Eco Safe paid Food Safety, whichever was less. The damage limitation was important because Eco Safe was attempting to show it lost business with Carl’s Jr. after the study. Because Eco Safe had not paid Food Safety, the contract clause prevented Eco Safe from recovering anything.
The court explained that the limited liability clause was a valid provision of the parties’ contract. The clause protected Food Safety not only against Eco Safe’s breach of contract claim, but also against Eco Safe’s claim of negligence. Eco Safe’s fraud claim also failed because it was barred by the economic loss rule, which limits a purchaser’s remedy against a seller to a breach of contract claim when the purchaser is disappointed with the product. Robinson Helicopter Co., Inc. v. Dana Corp., 102 P.3d 268, 357-58, 34 Cal.4th 979, 988. (Cal. 2004). The court awarded attorneys’ fees to Food Safety.
Food Safety Net serves as a reminder to look closely for contract clauses that limit liability and to utilize them to protect against contract and tort claims.