Limitation of Liability Clauses in Construction Contracts – Is Mine Enforceable?
On June 16, 1887, 150 years ago, Mr. Frank Primrose walked into the Philadelphia Western Union office with an encoded message for his agent dispatched to Ellis, Kansas to purchase wool. The message was sent, but no reply message was asked for, or paid for. Instead of sitting tight for further word, (because Primrose had just purchased all the wool he needed), his agent began to buy up all the wool he could, assuming those were his instructions. However, Western Union made a mistake in transcribing only one letter of the message, which made a huge difference in the content of the code they were using. All of this cost Mr. Primrose $20,000.00, a handsome sum in those times, and he sued Western Union for their mistake.
However, his case was not any more successful than his initial message attempt, because the Western Union “agreement” contained an “olde fashioned” limitation of liability provision, which dictated the damages that could be recovered for a mistake in an “unrepeated message” (one sent, but which was not repeated back to the sender to verify it was transcribed accurately), was the cost of sending the original message, to Mr. Primrose, $1.15. The Supreme Court of the land, in the case Primrose v. Western Union Tel. Co., 154 U.S. 1 (1894), held the limitation of liability clause enforceable because it was a “proper and lawful mode of securing a due proportion between the amount for which the carrier may be responsible and the freight he receives, and of protecting himself against extravagant and fanciful valuations.”
(The whole case can be found here.)
Limitation of Liability Clauses
Many industry form documents and custom construction contracts contain provisions shifting or limiting the respective parties’ risks. One of the main risk-limiting provisions seen primarily in the terms and conditions of professional service agreements is the “limitation of liability” clause (“LoL” clause). These clauses generally establish the maximum liability or exposure of the design professional if there is a claim. The purpose of these clauses is to recognize the proportional role of the professional service provider in the project and limit their liability according to the level of compensation received. If enforceable, the clause will serve to cap a party’s liability for damages to an amount certain.
Are they Enforceable? The Answer Depends Upon Your State’s Law
While these provisions are commonplace, not all U.S. jurisdictions find them enforceable. Though many states enforce them, still others hold them unenforceable unless properly worded, reviewing them under a strict scrutiny standard. Some states find them totally unenforceable for reasons ranging from violation of that state’s anti-indemnity statutes to public policy reasons.
Generally speaking, in order to contractually limit damages for a party’s future conduct, the contractual language at issue must be: 1) clear, 2) unambiguous, 3) unmistakable and 4) conspicuous, to be enforceable. While a contractual clause limiting the amount of damages that may be recovered for the acts of a party (limitation of liability clause) versus one that totally exonerates a party from its future conduct (exculpatory clause) are not exactly the same, some courts categorize both such clauses as “exculpatory clauses.”
An exculpatory clause is one that relieves a party from liability resulting from a negligent or wrongful act. Generally, exculpatory clauses in contracts are disfavored under the law of most states, and such contract provisions are strictly construed against the party claiming the benefit of the clause. Courts are reluctant to enforce contracts that relieve parties from the effects of their future acts, because, policy considerations and common sense tell you that, if exonerated, they will not use the same level of care they otherwise might. However, a limitation of liability clause simply places a fixed cap on the amount of damages that may be recovered against a contracting party in the event of a claim.
Generally, courts hold that such clauses are not per se against public policy, but several states are more protective, and many have enacted legislation, by way of their anti-indemnity statutes that hold such clauses void and unenforceable. In some situations, exculpatory clauses have been held to be invalid under particular statutory provisions and in other instances because the contract is one affected with a public interest. Statutory restrictions which preclude their use hold that statutory liability for negligence cannot be contracted away. Courts will analogize the clause to an indemnity provision for any unrecovered amounts over the liability cap, which results in one party indemnifying the other for their sole negligence. This generally runs afoul of an anti-indemnity statute, invalidating the clause.
Where the parties to a contract are sophisticated business entities dealing at arm’s length, the limitation is reasonable in relation to the design professional’s fee, and the damages are purely economic (versus a personal injury claim), most states will enforce a contract’s limitation of liability clause.
Enforceability of Limitation of Liability Clauses
There are several principles that emerge from those states that find limitation of liability clauses enforceable. As a rule, most states allowing them strictly construe them against the beneficiary of the clause. The clause must still meet the above four language requirements. However, a theme from these cases is that the courts are not in a position to re-write sophisticated parties’ business agreements, and will generally only enforce them as written. In other words, they must of themselves completely enumerate all of the instances where the liability of the design professional is to be limited.
Whether a claim arises out of “negligence” or “breach of contract,” the clause must address any circumstance for a potential claim, or the Courts will not enforce them. (If the clause only mentions negligence, then a breach of contract claim could be outside the protection of the clause, as an example). The Courts will not re-write the contract, and will strictly construe them against the party relying on them, limiting them to their exact language.
Some courts have held that, in the absence of evidence of separate negotiation or bargaining for the clause at issue, it will not be enforced. Some require evidence of separate consideration, or monetary recognition, for the limitation of liability clause. Other courts have held that, if the clause is not conspicuous, is set out along with several other numbered paragraphs, is in the same typeface and not highlighted in any way, it is not enforceable.
States that refuse to enforce the clauses do so for a number of reasons, including finding the clauses violative of the specific state’s anti-indemnity statute, or holding that they are unenforceable as against public policy. Due to the “professional” status of the designer, these states hold there exist “extra-contractual” duties that require invalidating these clauses. Some hold that claims of professional negligence operate outside of a contract, and so contract defenses simply are not available to limit liability in any way.
Risk-Management “Take Aways” for Drafting Effective Limitation of Liability Clauses
There are certain essential elements to any limitation of liability clause. Initially, it is important the clause be negotiated. This can be accomplished in several different ways. Use of pre-printed forms with blanks to fill in the appropriate liability caps (using either a standard figure, like $50,000.00, or the professional’s fee, whichever is higher, or some other limit which meaningfully takes into consideration the potential damages on the project), evidences the fact the clause was discussed. Highlighting the language in the agreement with different typeface, or bold print, or having a separate signature or initial block adjacent to the limitation of liability language will show it was conspicuous, negotiated and explicitly accepted.
All too many times, I have seen a well written LoL clause invalidated or ignored by a judge because a design professional failed to obtain a signed copy of its proposal letter or executed work authorization form which incorporated the terms and conditions containing the clause. Please remember: although you may have a “handshake agreement,” you do not have an enforceable “contract” with defenses you can use in response to a claim until the document is signed, and you should not begin work without a signed agreement.
Cases enforcing these clauses focus on the simple, clear and unambiguous nature of the language at issue. Therefore, the language must specifically state that it is a release of future “negligence,” “breach of contract” or other theory of recovery in order for the clause to be an effective waiver of these claims. General language releasing future claims will not suffice.
There must also be evidence of relatively equal bargaining power during contract negotiation, not a “take it or leave it” situation. When dealing with members of the general public, then, great care should be used with the clause to show it was understood and accepted, versus dealing with a sophisticated business entity at arm’s length.
Even following these suggestions does not guarantee a court will enforce the clause as written. These clauses will be subjected to heavy scrutiny. While these are simply suggestions, you should of course obtain the assistance of counsel in your respective jurisdiction to make sure that your limitation of liability language complies with the exact letter of the law in the subject state.
Most importantly, the design professional must be open to communicating with clients about the appropriate proportion of the potential responsibilities, liabilities and risk/reward that the project offers to all participants, so these limitations make much more sense in the context of who really benefits and who suffers, and who is best situated to deal with the risks that will undoubtedly arise as the project progresses.
If you have any questions about the enforceablility of your clause, please feel free to contact me!