New California Supreme Court Decision Impacts Hotel Management Agreements: Limitations on Damages for Intentional Wrongdoing Are Now Invalid

California Supreme Court’s Recent Ruling Impacts Hotel Management Agreements: Limits on Damages for Intentional Wrongdoing Deemed Invalid

In a significant decision on April 24, 2025, the California Supreme Court ruled in the case of New England Country Foods, LLC v. VanLaw Food Products, Inc. that contractual clauses cannot be used to restrict liability for intentional misconduct. According to Civil Code section 1668, any efforts to minimize damages for deliberate harm, including breaches of fiduciary duty, are not valid due to public policy, even when dealing with sophisticated commercial parties.

This ruling holds particular importance for hotel Owners and Management Companies, as their relationship involves both contractual responsibilities and fiduciary duties. The decision necessitates a reevaluation from both Owners and Managers on how they approach drafting limitations of liability clauses in hotel management agreements (HMAs) and their strategies in handling disputes.

The decision underscores the fiduciary duties that hotel Managers owe to Owners, in addition to their contractual obligations. Despite any disclaimers in the agreements, Managers are bound by fiduciary duties like loyalty, care, and disclosure, which cannot be waived through contracts.

Many hotel management agreements typically include clauses that limit liability, aiming to cap exposure to damages resulting from operational errors or disagreements. However, the recent Supreme Court ruling renders such clauses unenforceable when it comes to shielding Managers from consequences of intentional misconduct or breaches of fiduciary duty.

The distinction between a breach of contract and a breach of fiduciary duty is crucial. While minor operational lapses may fall under contract damages, actions involving self-dealing, bad faith, or gross mismanagement may lead to allegations of fiduciary breaches, warranting full tort remedies.

The ruling also has broader implications beyond California, aligning with how many jurisdictions view contractual attempts to limit liability for intentional misconduct. Across the country, courts generally reject damage caps or waivers for willful or intentional acts, emphasizing public policy over contractual agreements.

In conclusion, the California Supreme Court’s decision serves as a reminder that contractual limitations of liability will not shield against claims related to intentional wrongdoing. This new development prompts Owners and Management Companies nationwide to review their agreements to ensure compliance with this established public policy trend.