[Don’t bother reading this post! It has been superseded by this post.]
I was pleased to see that today D.C. Toedt posted on his blog this item about defining gross negligence in a contract. It’s something that I’d idly thought about before consigning it to a far corner of my mind.
In his post, D.C. considers the caselaw regarding the effect of releasing a contract party in advance from liability for its gross negligence. He notes that different U.S. states define gross negligence differently, and that many foreign jurisdictions apparently don’t recognize the concept. That by itself is something that drafters should bear in mind.
He goes on to propose a contract definition of gross negligence, concluding as follows:
A U.S. court might well disregard such a contractual definition of gross negligence. It might instead apply whatever definition the court deemed to be required by applicable law.
But there would seem to be at least a chance that a court might hold that public policy did not bar the parties from agreeing to their own definition of gross negligence.
A contractual definition of gross negligence might therefore be helpful or even essential to determining whether a risk-shifting clause should be pierced.
So all in all, including a definition of gross negligence in a contract is probably worth the effort.
I’d like to pick up where D.C. leaves off. I apologize to D.C. for moving the discussion to my blog, but what I have to say wouldn’t really fit as a comment to his post.
I see a number of issues:
First, contracts refer to gross negligence in two different ways: they release Acme from liability for gross negligence, or they carve out gross negligence from provisions (a release, or indemnification provisions) that benefit Acme. The former can fall foul of a state’s rule that such releases are unenforceable as against public policy. By contrast, a carve-out excluding gross negligence from a provision benefiting Acme wouldn’t have any public-policy implications.
Second, defining gross negligence in a contract would have no effect on enforceability of an advance release from liability. A court would consider whether the conduct in question constitutes gross negligence under the law of the forum, and whether the contract sought to release the party in question from liability for that action. What label the contract puts on that conduct would be irrelevant.
Third, a definition of gross negligence might be acceptable for purposes of a carve-out excluding gross negligence from a provision benefiting Acme, but it’s hard to see how it would be of any use. Determinations of gross negligence are so fact-specific, and any definition would be so vague, that parsing subtle variations in a definition of gross negligence while drafting the contract seems pointless.
And fourth, given that determinations of gross-negligence are so fact-specific, who is going to decide whether a carve-out applies? Can the party that would otherwise have to pay Acme decide unilaterally? That seems like an invitation to litigation. Perhaps provisions that carve out gross negligence should provide that the carve-out would apply only after a court has made a determination of gross negligence. That would raise the same issues as the meaning of “prevailing party” (see this post). Carve-outs using a negligence standard raise the same issue.
[Updated September 5, 2012: How about referring to recklessness instead of gross negligence? It’s a less legalistic word.]