Federal Appeals Court Emphasizes the Importance of Enforcing Contractual Limitations on Consequential Damages

By Cliff Brinson and Kayla Marshall

A recent federal court of appeals decision endorses consequential damages exclusions in commercial contracts, and makes clear that such limitations are enforceable under North Carolina law.

The United States Court of Appeals for the Fourth Circuit ruled that a peanut company whose “peanut dome” facility caught fire and exploded after pesticides were misapplied could not sue its extermination company for $19 million in damage caused by the allegedly negligent pesticide application. The ruling is based on a consequential damages exclusion in the parties’ contract, which stated that the amounts payable by the peanut company for the extermination company’s services were not “sufficient to warrant [the extermination company] assuming any risk of incidental or consequential damages,” including risks to “property, product, equipment, downtime, or loss of business.” Therefore, the peanut company could not recover expenses related to property damage and loss of business, even though misapplying the pesticide led to a fire, an explosion, the loss of twenty million pounds of peanuts, lost business income, and various cleanup costs.

In making its decision, the court emphasized the importance of enforcing contractual limitations on consequential damages, noting that such limitations serve to “further predictability in business relations” by allowing “parties to bargain over the allocation of risk.” The court stated that where, as in the instant case, the parties are “sophisticated commercial entities who entered into an arm’s length transaction,” contractual limitations on consequential damages are rarely unconscionable. The court also rejected the peanut company’s argument that a limitation on consequential damages is against North Carolina public policy.

Finally, the court held that the peanut company’s negligence claim also failed because its allegations arose from a breach of contract, and the peanut company could not “undo that bargain through the vehicle of tort law” by transforming the breach of contract claim into a negligence claim.

This case was decided in federal court, but it applies North Carolina law and should have persuasive value in North Carolina state courts as well. The decision demonstrates a commitment to freedom of contract in commercial cases. It is also a reminder of the importance of carefully considering whether a consequential damages limitation should be included in a contract, and the need to understand and properly allocate potential risks when contracting.

A copy of the opinion (Severn Peanut Co. v. Industrial Fumigant Co., No. 15-1063) can be found here.