Oral Argument Preview: The Effect of Reckless Conduct on a Contractual Limitation of Liability Clause. American Municipal Power, Inc. v. Bechtel Power Corporation.

Update: On June 16, 2016, the Supreme Court of Ohio declined to answer the certified question and dismissed the case.

Read the analysis of the oral argument here.

On October 27, 2015, the Supreme Court of Ohio will hear oral argument in the case of American Municipal Power, Inc. v. Bechtel Power Corporation, 14-1847. In this breach of contract action, the court agreed to answer this certified question from the U.S. District Court, Southern District of Ohio, Eastern Division: whether reckless conduct by the breaching party, as defined in Anderson v. Massillon,  renders a contractual limitation of liability clause unenforceable.

Case Background

American Municipal Power, Inc. (“AMP”) is a wholesale supplier for municipal power systems that purchases, generates, and distributes power for public utility companies across nine states. AMP currently serves 132 municipalities, which AMP calls member communities.

AMP, together with 81 member communities, sought to develop and construct a coal-fired power plant along the Ohio River, known as the American Municipal Power Generating Station, in Meigs County, Ohio. It hired Bechtel Power Corporation (“Bechtel”) in January 2009 to construct the station. During the negotiations leading up to the contract for the station, Bechtel provided AMP with an initial cost estimate.

The contract ultimately signed by AMP and Bechtel required Bechtel to timely identify cost and scheduling concerns that might impact the project’s cost estimate, and to trend similar construction projects that might introduce cost impacts to the project’s cost estimate. (The identification of cost and scheduling impacts is known as “trending,” and that portion of the contract is known as the trend provision.) Any trends or issues were to be reviewed with AMP at least once a month to allow AMP to evaluate any new developments before they were implemented. The contract also contained a provision limiting liability to $500,000.

In May 2009, AMP was reevaluating whether to build the plant, and requested that Bechtel update its price estimate. Bechtel advised AMP that the estimated cost had declined by $157 million. Based on this advice, AMP’s participating member communities voted to move forward with the Project. AMP proceeded to enter into contracts on behalf of its member communities totaling $400 million to design and manufacture the plant’s boilers and generators. AMP also purchased the land on which the plant was to be built, and paid millions of dollars to Bechtel and others while construction of the plant was underway.

Five months later, Bechtel advised AMP that the cost of the project would be over $1 billion more than Bechtel’s estimates. AMP’s member communities voted to cancel the project. AMP terminated all of the contracts for the plant, and incurred substantial penalties as a result.

In February 2011, AMP filed suit against Bechtel, alleging that Bechtel materially breached the EPC contract by failing to fulfill its obligations to keep AMP informed of any trends among similar projects that might impact cost information. It alleged that Bechtel had cost AMP and its member communities in excess of $97 million.

In the summary judgment order, Judge Michael Watson of the U.S. District Court in Dayton found that Bechtel was required to trend cost and schedule impacts as well as similar project information that may affect the cost of the project. Bechtel conceded that it did not trend similar project information. The court held that the limitation of liability clause in the contract was enforceable, limiting AMP’s damages to $500,000. The court interpreted Ohio law as requiring enforcement of limitation of liabilities clauses unless the breaching party’s conduct was “willful” or “wanton.” The court defined “wanton” as exercising “no care whatsoever” and found that Bechtel had exercised “some care,” entitling Bechtel to summary judgment on the enforcement of the limitation of liability clause. The court rejected AMP’s argument that reckless conduct renders a limitation of liability clause unenforceable.

Recognizing that there was no controlling Supreme Court of Ohio precedent on whether reckless conduct renders a limitation of liability clause unenforceable, Judge Watson certified the question of state law to the Supreme Court of Ohio.

Key Statutes and Precedent

Anderson v. Massillon, 2012-Ohio-5711.  (Willful or wanton misconduct is a different and higher standard than recklessness. Reckless conduct is characterized by the conscious disregard of or indifference to a known or obvious risk of harm to another that is unreasonable under the circumstances and is substantially greater than negligent conduct.)

City School Dis. Bd. Of  Edn. v. Conners,  2012-Ohio-2447. (Contracts which bring about results which the law seeks to prevent are unenforceable as against public policy. Courts should determine when this public policy exception must be recognized, but the legislative branch is the ultimate arbiter of public policy.)

Richard A. Berjian, D.O., Inc. v. Ohio Bell Telephone Company, 54 Ohio St.2d 147 (willful or wanton conduct can render a limitation of liability clause ineffective; effect of reckless conduct not discussed.)

Thomas v. Atlantic C.L.R. Co., 223 F.2d 1 (5th Cir. 1955) (To constitute wantonness, a party must, with reckless indifference to consequences, consciously and intentionally commit a wrongful act or omission that produced the injury.)

American Municipal Power’s Argument

AMP argues that the answer to the certified question should be yes.

AMP argues that reckless conduct by a breaching party renders a contractual limitation of liability clause unenforceable as against public policy.

According to AMP, the Ohio legislature has expressly adopted a wanton or reckless standard throughout the Ohio Revised Code in determining conduct sufficiently culpable to warrant the loss of statutory benefits or protections that would otherwise limit liability. It cites to numerous statutes that remove benefits or protections for reckless behavior. For example, AMP points out that police are immune from liability in a civil action unless the officer acted with malicious purpose, in bad faith, or in a wanton or reckless manner. AMP argues that the General Assembly’s consistent adoption of a reckless standard reflects a general understanding that it is against public policy to protect the actions of individuals who act in a reckless manner.

AMP argues that a deeper reading of the holding in Berjian suggests that a company may not contract to limit its liability if its actions are reckless. Berjian, AMP notes, cites to a case in the 5th Circuit. That case was remanded for trial, and eventually returned to the 5th Circuit as Thomas v. Atlantic C.L.R. The Thomas court held that wantonness requires recklessness and intent to commit the wrongful act or omission that produced the injury in controversy. AMP argues that the definition of wanton in Thomas is substantially the same as the definition of recklessness that the Ohio Supreme Court adopted in Anderson.

AMP also notes that Berjian quotes Prosser’s Law of Torts, which provides that it would be against public policy to enforce agreements that covered reckless conduct.

Alternatively, AMP argues that the reckless standard in Section 195(1) of the Restatement (Second) of Contracts should be adopted by the Court. The Restatement provides that exempting a party from tort liability for harm caused recklessly is unenforceable on public policy grounds. AMP notes that several jurisdictions have adopted this policy in cases involving contractual limitations of liability clauses. AMP also argues that a reckless standard is also supported by the duty of good faith and fair dealing in Section 205 of the Restatement (Second) of Contracts. The Restatement provides that every contract imposes upon each party a duty of good faith and fair dealing in its performance and enforcement. It argues that denying the benefit of a limitation of liability clause to a breaching party whose conduct a court finds to have been reckless is entirely consistent with notions of honesty and reasonableness in the enforcement of a contract that underlie the duty of good faith and fair dealing expressed in the Restatement.

Finally, AMP notes that the reckless conduct as defined in Anderson, while different from willful or wanton conduct, is still a high standard, and that parties that engage in reckless conduct should not be allowed to avail themselves of a contractual limitation of liability.

Bechtel Power Corporation’s Argument

Bechtel argues that the answer to the certified question should be no.

Bechtel argues that AMP is seeking a significant change in Ohio law in order to expand Bechtel’s liability beyond what it accepted in its agreement with AMP. It argues that the right of contracting parties to limit their liability in the event of a breach is well settled under Ohio law.

According to Bechtel, liability limitations should only be set aside for willful or wanton breaches. Ohio law requires a showing of willful or wanton misconduct to abrogate a limitation of liability clause. Adoption of a recklessness standard would be contrary to a party’s freedom of contract, a central tenant of Ohio law.

Bechtel disputes AMP’s argument that Ohio law consistently favors removing rights and protections for reckless behavior, citing numerous incidents where the legislature has required willful or wanton conduct to abrogate such a statutory immunity. Further, it notes that the General Assembly has never expressed a policy preference for a “reckless” standard.

Bechtel further argues that the standard under Berjian requires willful or wanton behavior, and contends that AMP is wrong when it argues that a reckless conduct standard is consistent with the court’s opinion in Berjian. Further, the court in Anderson clarified any confusion that existed between the “willful or wanton” and “reckless” standards. Finally, Bechtel argues that stare decisis compels the court to uphold the Berjian holding and hold that, absent willful or wanton misconduct, contractual limitations on liability are enforceable.

American Municipal Power’s Proposed Proposition of Law

Reckless conduct by the breaching party, as defined in Anderson v. Massillon, 134 Ohio St.3d 380, 2012-Ohio-5711, 983 N.E.2d 266, renders a contractual limitation of liability clause unenforceable.

Amicus In Support of Bechtel Power Corporation

Amicus Council of Retail Merchants (“OCRM”) is Ohio’s oldest and largest advocate for the retail and wholesale industries, representing more than 6,400 retailers and wholesalers across the state. OCRM argues that Ohio law upholds freedom of contract in the absence of compelling countervailing public policy, and upholds freedom of contract subject only to narrow and compelling exceptions. OCRM argues that individuals and businesses should be allowed to mutually define their contractual rights and obligations with minimal governmental intrusion. It further argues that neither the legislature nor the courts have ever recognized a public policy against limitations of liability for reckless behavior. Further, it contends that there are far more Ohio statutes which limit statutory protections for “willful or wanton” misconduct than for conduct that is “reckless.”

Finally, the Council notes that lowering the standard from “willful or wanton” to “reckless” would severely impact the ability of parties to allocate risk through liability limitation provisions.

Student Contributor: Michael Elliott

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