Credit agreements by their terms commonly bar the borrower from seeking punitive, indirect, special or consequential damages for a breach of the agreement by lenders and their affiliates. The clauses, as enforced, prevent a borrower from obtaining damages for harm that may be suffered by the borrower's business if the lender wrongfully declines to fund. The clauses prevent lenders from exposure to open-ended damages claims if the lenders refuse to lend to a borrower, including damages that are the direct and indirect result of the failure to lend.
The enforceability of these provisions, and their broad applicability, was recently upheld by the U.S. District Court for the Southern District of New York in the bankruptcy case involving the Lyondell Chemical Company (“Lyondell”).1 In Lyondell, the parent of the borrower, Access Industries (“Access”) agreed in March 2008 to provide Lyondell with a $750 million revolving credit facility (the “Access Revolver”). Lyondell drew $300 million under the Access Revolver in October of 2008, which was promptly repaid. However, in December of 2008, when Lyondell sought to draw the full $750 million, Access refused to fund.2 Faced with a severe liquidity crisis, Lyondell filed for chapter 11 protection shortly thereafter. The Lyondell unsecured creditors committee brought suit against Access for breach of contract (among other claims), and the suit was continued by the trustee for the Lyondell litigation trust after Lyondell exited chapter 11 in 2010.3
In upholding the Lyondell limitation on damages clause, the District Court held that under New York Law, generally, “[c]ontract provisions limiting remedies are enforceable unless they are unconscionable” or unduly oppressive4 . It also held that a limited exception to this principle, the Kalisch-Jarcho doctrine, “exists when a party ‘in contravention of acceptable notions of morality’ engages in conduct that smacks of intentional wrongdoing.”5 The court declined to find that inequality of bargaining power, in and of itself, would negate the limitation of liability provision. Although Access controlled Lyondell and was found to have breached the Access Revolver by not funding, the District Court held that none of the above listed principles that would invalidate the limitation on liability clause were present. While upholding the limitation on damages clause, the District Court did award restitution damages to the trustee in the full amount of the commitment fee paid by Lyondell for the credit agreement.
Lyondell highlights that under New York law, borrowers in breach of contract actions against lenders face a high bar in obtaining relief from limitation on liability clauses. Refusal to fund, claims of economic benefit to the lender or disparity of bargaining power will generally be insufficient to invalidate these clauses. Instead, the facts and circumstances must demonstrate affirmatively and unequivocally that the clause is unconscionable, or the lender has engaged in intentional wrongdoing