The Court of Appeals recently clarified the ability of parties to limit their liability for grossly negligent conduct in a breach of contract action. In Deutsche Bank National Trust Company v. Morgan Stanley Mortgage Capital Holdings, the court held that the public policy rule prohibiting parties from insulating themselves for damages resulting from grossly negligent conduct only applies to contractual provisions that either completely immunize a party or provide for solely nominal damages. It does not apply to other provisions that simply limit, but do not eliminate, the remedies available to a plaintiff for breach.

Plaintiff is the trustee for a residential mortgage-backed security (RMBS) trust for which defendants served as sponsor and depositor. In essence, defendants purchased 5,337 residential mortgage loans and pooled them into a trust which then issued certificates that were sold to investors. In connection with these transactions, defendants made a series of representations and warranties concerning the mortgage loans. The governing documents contained a “sole remedy” clause providing that if a mortgage loan in the pool breached a representation or warranty in a material manner, the plaintiff’s sole remedy is to require defendants to cure the breach or repurchase the loan at a contractually defined price.

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