What’s On Their Minds: 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. 2016-Ohio-3431.

On October 27, 2015, the Supreme Court of Ohio heard 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

Petitioner American Municipal Power, Inc. (AMP), a wholesale supplier for municipal power systems, sought to develop and construct a coal-fired power generating plant in Meigs County. It hired Respondent Bechtel Power Corporation (Bechtel) in January 2009 to engineer and construct the plant. The project was to be completed in November of 2009.

The thousand page 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 impact the project’s cost estimate. The contract also contained a provision limiting liability to $500,000.

AMP proceeded to enter into contracts on behalf of its member communities totaling $400 million. In October of 2009, Bechtel advised AMP that the cost of the project would be over $1 billion more than Bechtel’s estimates. AMP cancelled the project and incurred substantial penalties as a result.

In February 2011, AMP filed suit against Bechtel in federal court, alleging that Bechtel materially breached their contract by failing to fulfill its obligations under the contract’s trend provision.  It alleged that Bechtel had cost AMP and its member communities in excess of $97 million.

Bechtel moved for partial summary judgment to enforce the limitation of liability clause in the contract.  The District Court granted Bechtel’s motion on the enforceability of the limitation of liability clause, finding that reckless conduct was inadequate to meet the standard in Ohio to set aside a contractual limitation of liability provision. But  the court agreed to certify that question to the Supreme Court of Ohio–whether reckless conduct is sufficient to set aside a limitation of liability clause–before proceeding with a trial on the issues of breach of contract, causation, and damages.

Read the oral argument preview of this case here.

Key Precedent

Anderson v. Massillon, 2012-Ohio-5711.  (Willful, wanton, and reckless conduct describe different degrees of care and are not interchangeable. Willful and wanton misconduct are  more culpable 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.)

Richard A. Berjian, D.O., Inc. v. Ohio Bell Telephone Company, 54 Ohio St.2d 147 (1978) (absent a showing of willful or wanton misconduct, a limitation of liability clause is valid and enforceable.)

At Oral Argument

Arguing Counsel

Stephen C. Fitch, Taft Stettinius and Hollister, LLP, Columbus, for Petitioner American Municipal Power.

William G. Porter, Vorys, Sater, Seymour and Pease LLP, Columbus, for Respondent Bechtel Power Corporation

The Certified Question

Whether reckless conduct by the breaching party, as defined in Anderson v. Massillon,  renders a contractual limitation of liability clause unenforceable.

AMP’s Argument

The court is being asked to determine as a matter of Ohio common law whether a party to a contract can consciously disregard a known or obvious risk of harm to another that is unreasonable under the circumstances and substantially greater than negligent conduct and yet still assert the protection of a limitation of liability clause. Such a contract provision is against the public policy of Ohio.

While the court has said in the Berjian case that willful or wanton conduct can invalidate a contractual limitation of liability provision, it has not addressed the issue of whether reckless conduct, as defined in Anderson v. Massillon, can also invalidate such a provision. This is a matter of first impression. Reckless conduct should also invalidate such a contract provision because it is of the same genre as willful and wanton conduct. The answer to the certified question should be yes.

If the court rules in favor of AMP, the case will go back for Judge Watson to determine if AMP has presented sufficient evidence of reckless conduct to invalidate the limitation of liability clause.

Bechtel’s Argument

This is a contract case involving a 1000 page agreement between two large and sophisticated companies. AMP does not now like the limitation of liability clause that it freely negotiated and agreed to with Bechtel. This was not a boilerplate provision. It was negotiated between the parties.

The Anderson case is a tort case, which sets forth a continuum of conduct. Its only role in this contract case is the definitions it supplies.  In Berjian, which has been good law for nearly forty years, with no evidence of confusion, no effort to overturn it, or even to limit its application, the court acknowledged that the parties should be free to allocate risk as they see fit, with one exception. The court drew the line at willful and wanton conduct.  Those are the only bases on which to invalidate a contractual limitation of liability provision. There is no reason to change or expand the holding in Berjian. Recklessness is below the line set in that case, and there is no public policy in this state which would prohibit parties from negotiating for such a standard.

AMP’s reliance on the public policy doctrine is completely misplaced in this case. There is no reason for this court to judicially intervene—no public policy, no statute, no equity that would support changing the law now in the middle of this federal contract dispute. The court should affirm the standard set in Berjian, that absent willful or wanton conduct, limitations of liability clauses are enforceable, and rule that recklessness is not sufficient to deem such a clause unenforceable.  The certified question should be answered “no.”

What Was On Their Minds

 The Certified Question

Would recklessness mean that the limitation on damages in the contract is gone, asked Justice Pfeifer? Later he commented that either answer the court gave to the certified conflict would have an impact, unless the court decides it doesn’t want to answer the question.

Isn’t the judge asking specifically whether as a matter of policy in Ohio, recklessness voids this clause, asked Justice O’Neill?

We’ve got case law, and we’ve got Berjian which says willful and wanton is what will trip the trigger, but nothing else, so we could answer Judge Watson by saying, no, just rely on Berjian, commented Chief Justice O’Connor in what may well be the answer that the court gives.

Lack of Context

Justice Pfeifer commented that the dilemma for him in the case was the absence of the big picture in being asked to answer this certified question, noting that usually when the court is asked to make a public policy decision it has all the information in front of it, but in this case it is in the dark. Later, he commented that the court was being asked to answer a kind of law school question without knowing the competing factors that “are miles in length.”

What type of response do we offer to a question which really asks us to simply tell the court whether reckless behavior can render a limitation of liability clause unenforceable, asked Justice O’Donnell, noting in a key comment of the day that the certified question seemed to be operating in a vacuum independent of any factual findings yet to be made.

Wouldn’t this question be answered more appropriately in a case that comes directly to us in an actual dispute from a trial court, then to an appellate court, then to us, rather than on something that isn’t our fight, Chief Justice O’Connor asked both lawyers in another key question of the day.

The Federal Court Case

Is the controversy in federal court still alive, asked Justice O’Neill? Hasn’t summary judgment already been granted?

Has the federal court made a determination if the conduct in this case was willful, wanton, or reckless, asked Justice Lanzinger? Justice O’Donnell later asked the same thing, commenting that the Ohio high court was “sort of an extrajudicial part of a determination that is being made by Judge Watson in the federal court, and we are going to make a determination on a very limited record.”

Is this a matter of what did they (Bechtel) know and when did they know it and when did they convey it to AMP, Chief Justice O’Connor asked both counsel?

Public Policy

Are we in the public policy arena by being asked to knock out a limitation of damages provision on grounds of recklessness, asked Justice Pfeifer?

Mixing Torts and Contracts

Are we really dealing with tort standards in a contract case, asked Justice Pfeifer?

Justice Lanzinger asked whether the court should import the tort definitions from Anderson into this contract action.

This Contract

Why didn’t you just put something in the contract that would have solved this, Chief Justice O’Connor pointedly asked counsel for AMP. Justice O’Neill later asked the same thing to both lawyers, wondering why a 1000 page contract had no such provision.

Reckless, Willful, and Wanton

The court has held in several cases that intentional conduct can be limited, commented Justice O’Donnell, noting that the court was now at something less than intentional and more than negligent. He went on to add that until Anderson (which he authored) was decided, there was some confusion in Ohio’s jurisprudence as to what reckless conduct meant, and whether or not it was a part of willful and wanton, which was why there was no body of case law on recklessness by itself. If a party engages in a conscious disregard of the rights of others, should that conduct be subject to a limitation of liability, he asked? Has there been a determination that the conduct in this case was reckless?

Would anything more than simple negligence invalidate a limitation of liability clause, asked Justice Lanzinger?

Anderson

The court has adopted the definition of recklessness that we promulgated in Anderson—is that the focus of what you are asking, Justice O’Donnell asked counsel for AMP. (answer: yes)

Does this entire thing hinge on the definitions from Anderson asked Chief Justice O’Connor? Should the court take the finding from that case that willful, wanton, and reckless are not interchangeable, and apply it to this case, even though that was a political subdivision immunity case? Can Anderson be distinguished based on the fact that it was a tort liability immunity case and not a contract case? Are the definitions transportable?

Does the language in Anderson relate to a continuum of conduct, asked Justice Lanzinger?

How it Looks from the Bleachers

To Professor Bettman

Like a win for Bechtel in one of two ways-either the court is going to tell Judge Watson it has decided not to answer the question, or as Chief Justice O’Connor suggested in a line of questioning to both sides, the court is not going to expand the bases on which a limitation of liability clause can be found to be unenforceable in a case in which state court has no stake, because there is no actual case in controversy that has percolated its way up through the normal appellate process. In other words, as several of the justices noted in various ways, the case is in front of the court with no context.  In precedential terms, the court is not going to extend the holding of Berjian, that willful and wanton conduct can invalidate a limitation of liability clause, to include reckless conduct in a case in which it has no real information. There was also a strong sense among the justices who talked that AMP had negotiated itself a bad deal and was now looking for a way out.

While both sides agreed that the definitions of willful, wanton, and reckless spelled out in Anderson v. Massillon apply to what otherwise is a contract action, it was also clear the court doesn’t want to go too far with applying tort concepts here.  Actually, as Justice Lanzinger noted at argument, she and Justice Pfeifer disagreed with the majority holding in Anderson that willful, wanton, and reckless were different, finding the terms were interchangeable—the position urged by AMP here, which argued the terms were all of the same “genre.” But those findings by Justices Lanzinger and Pfeifer in Anderson were in the context of sovereign immunity for a tort claim, which to me is very different from  conduct in a contract action.

To Student Contributor Michael Elliott

Though two justices,  French and Kennedy, were silent in this argument, this case was easy to call. Without a doubt, Bechtel prevails. American Municipal Power had an uphill battle to fight, and I don’t think its counsel was prepared for it. At any rate, I don’t see the court ruling in its favor for two important reasons. First, out of respect for the principle of freedom of contract, and second, because the court lacks sufficient background information on this case.

This court is simply not willing to create a new standard in contract law because AMP failed to account for Bechtel’s reckless behavior in its limitation of liabilities clause. AMP was certainly fully capable of drafting contract terms more favorable to it, and this court is not going to take pity on AMP for failing to do so. As counsel for Bechtel said, both parties are sophisticated companies and were free to allocate risk in their agreement. Chief Justice O’Connor was quick to pounce on this fact, asking why the parties simply didn’t contract to waive the limitation of liabilities clause in the event of Bechtel’s recklessness. Counsel for AMP’s reply, that the parties were relying on common law, was not well taken.

In addition, several of the justices mentioned that they were uncomfortable modifying common law in answering a certified question with little to no background information. The Chief Justice clearly saw no reason to modify established law, and Justice Pfeifer repeatedly expressed the need for more information on this case. The court had very little information on this case that wasn’t in dispute, and clearly is not willing to create such a far-reaching public policy exception without more.

If AMP’s attorneys had drafted a better contract, it would not be before the Supreme Court. AMP will get no pity from the Court for poor drafting and negotiating.

 

 

 

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