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ConstructionRisk.com Report
http://www.ConstructionRisk.com
Vol. 11, No. 4, April 09
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Inside
This Issue:
• Limitation
of Liability Enforced in
Arizona
is Matter for Summary
Judgment;
• Economic
Loss Doctrine Enforced in
Nevada
to Prevent Property Owner Recovery against Design Professional for
Alleged Negligence
;
• Economic Loss Doctrine Enforced in
Indiana
to Prevent Property Owner Recovery against Design Professional for
Alleged Negligence and Negligent Misrepresentation;
• Economic Loss Doctrine was no bar to Negligence Action
against Design Professional in New York.
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Article
1
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Limitation
of Liability Enforced in
Arizona
is Matter for Summary Judgment
The Supreme Court of Arizona held that a limitation
of liability clause in a design professional contract is enforceable on
a summary judgment motion, without need to have a jury review it, where
the clause put a cap on liability in the amount of the fee but did not
attempt to relieve the firm of all liability. Since the clause didn’t
eliminate all liability, it was not an “assumption of the risk”
clause subject to a state statute that would otherwise made
enforceability of assumption of the risk clauses a matter for jury
decision. Such clauses,
especially in commercial contracts, are not contrary to public policy
and are, therefore, generally enforceable.
Unlike the clause in the
Georgia
case of Lanier v. Planners,
this clause did not attempt to limit third party claims, but instead
addressed only claims by the client against the design firm.
As such, the clause was not an indemnity clause and was therefore
not subject to any anti-indemnity statute.
This decision is particularly important because the court
distinguishes the
Georgia
decision that had caused so much concern for design professionals and
their counsel, and it provides useful insight for drafting clauses to be
enforceable.
In 1800 Ocotillo, LLC v. WLB
Group, Inc., 196 P.3d 222 (Az, 2008), a surveyor entered into a
contract with a developer to perform a survey to identify boundary lines
and rights-of-way on land to be developer into a townhouse community.
The operator of a neighboring canal subsequently claimed an
interest in a right-of-way that the surveyor failed to accurately show
in its survey. As a result
of the discrepancy, the City of
Phoenix
denied the developer certain building permits.
The developer filed suit against Surveyor for alleged negligence
in the preparation of the survey that caused Developer to incur
increased costs from construction delays and additional engineering
services and designs. In
response, Surveyor filed a motion for partial summary judgment arguing
that its liability, if any, was capped in the amount of its fee pursuant
to a limitation of liability (LoL)clause that read as follows:
“Client agrees that the liability of WLB, its agents and
employees, in connection with services hereunder to the Client and to
all persona having contractual relationships with them, resulting from
any negligent acts, error and/or omissions of WLB, its agents and/or
employees is limited to the total fees actually paid by the Client to
WLB for services rendered by WLB hereunder.”
In an effort to avoid summary judgment, the developer argued to
the trial court that the LoL clause was contrary to public policy.
The trial court rejected that argument and granted partial
summary judgment limiting the potential liability to the amount of fees
the surveyor had received. This
was appealed to the court of appeals which, although agreeing that the
LoL clause didn’t violate public policy, nevertheless reversed the
trial court summary judgment because it found the clause created a
“defense of assumption of risk” and this was required by state
statute to be submitted to the jury to decide whether to enforce.
The Supreme Court of Arizona reversed the court of appeals
decision and issued a well reasoned decision that cites several other
recent LoL decisions from other jurisdictions, and explains and
reaffirms several important basic principles of contract law that have
great significance for managing risks in contracts.
The court starts its analysis by noting that “Our
law generally presumes, especially in commercial contexts, that private
parties are best able to determine if particular contractual terms serve
their interests.”
Next, the court notes that the LoL clause is not
subject to the state’s anti-indemnity statute that provides:
“A covenant, clause or understanding
in, collateral to or affecting a construction contract or
architect-engineer professional service contract that purports to
indemnity, to hold harmless or to defend the promissee from or against
liability for loss or damage resulting from the sole negligence of the
promissee or the promissee’s agents, employees or indemnitee is
against the public policy of this state and is void.”
The concern of this anti-indemnity statute is it to avoid having a
party shift ALL liability for its own negligence to another party.
The purpose of anti-indemnity statutes, explains the court, is
primarily to prevent parties from eliminating their incentive to
exercise due care. “Because
an indemnity provision eliminates all liability for damages, it also
eliminates much of the incentive to exercise due care.”
In contrast, the LoL provision does not completely insulate the
surveyor from liability but merely limits the amount of the liability.
As stated by the court: “This
provision in the [ ]
contract does not completely insulate WLB from liability, as would an
indemnity or hold harmless provision, nor does it require Ocotillo to
defend WLB. The provision
merely limits liability.”
The court notes that “it is possible that a limitation of
liability provision could cap the potential recovery at a dollar amount
so low as to effectively eliminate the incentive to take
precautions….” But
the court did not find that to be the case here.
The plaintiff also
argued that, pursuant to a state statute, shareholders of
“professional corporations” are “personally and fully liable and
accountable for any negligent or wrongful act or misconduct” that the
shareholder commits while rendering services on behalf of the
professional corporation. Another
statute cited by the plaintiff provides that each member or employee of
the firm that performs the services on behalf of the firm “shall
remain personally liable for any results of the negligent or wrongful
acts, omissions or misconduct committed by him.”
The court rejected plaintiff’s argument that these statutes
were intended to prevent professionals from limiting their liability
where the engineering firm was not a “professional” corporation.
It was a traditional corporation and the statutes did not apply
to it.
It is important to note that the court here reviewed and
considered the decision in the recent Georgia limitation of liability
case of Lanier v. Planners &
Engineers, 663 S.E.2d
240 (2008) which had in turn referred to the lower appellate court
decision in 1800 Ocotillo. The
key, according to the court, was that unlike the
Georgia
case, the LoL clause at issue here did not contain any reference to
limiting liability for third-party claims brought by the general public.
Important for understanding how future cases might be reviewed in
Georgia
, the Arizona Supreme Court notes: “Lanier also distinguished , and
apparently approved, the liability-limiting clause is Valhal,
which is virtually identical to the provision at issue here.”
The court rejected the plaintiff’s argument that the LoL
constituted an assumption of the risk clause that was governed by a
state statute that limited the applicability of such assumption of the
risk clauses. The court
stated that the statute must be correctly interpreted to apply only to
clauses that relieve a defendant of “any” duty, and that where such
a harsh result in possible because all such duty has been eliminated, a
jury must be permitted to decide whether the clause is enforceable.
The key decision by the Supreme Court in this LoL case is that the
LoL does not create such a harsh result as to constitute an assumption
of the risk clause that must go to the jury for determination.
In fact, the court noted: “Moreover, the benefits of such
agreements in allowing parties to prospectively allocate potential
losses in excess of the cap would be largely lost if their
enforceability turned in every case on after-the-fact jury
determinations.”
Risk Management Notes:
Several important lessons are learned from this decision
including:
(1)
Keep the limitation of liability clause and any indemnity clause
totally separate and apart;
(2)
Don’t attempt by the LoL clause to relieve the firm of all
liability or to cap the liability so low as to make it unenforceable;
(3)
Make the LoL clause apply to actions against any principal,
officer, agent and employee of the corporation as well as to the
corporation itself.
In addition, it is probably also prudent to
introduce the clause with a phrase such as “To the fullest extent
permitted by law.”
Finally, it is important that the clause clearly
state that the LoL applies to all causes of action including breach of
contract, breach of warranty, and tort, including negligence.
About the author: All articles
in this issue of the ConstructionRisk.Com Report are written by
J. Kent Holland, a construction lawyer located in Tysons Corner,
Virginia, with a national practice (formerly with Wickwire Gavin,
P.C. and now with Construction Risk Counsel, PLLC) representing design
professionals, contractors and project owners. He is also founder
and president of ConstructionRisk, LLC, a consulting firm providing
consulting services to owners, design professionals, contractors and
attorneys on construction projects. He is publisher of
ConstructionRisk.com Report and may be reached at Kent@ConstructionRisk.com
or by calling 703-623-1932. This article is published in
ConstructionRisk.com Report, Vol. 11 No. 4 (April 2009).
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Article
2
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Economic
Loss Doctrine Enforced in
Nevada
to Prevent Property Owner Recovery against Design Professional for
Alleged Negligence
The Nevada Supreme Court answered “yes” to the
question of whether the economic loss doctrine applies to preclude
negligence-based claims against design professionals, such as engineers
and architects, who provide services in the commercial property
development or improvement process, when the plaintiffs seek to recover
purely economic losses. As
the term “economic loss” was used by the court, it means “the loss
of the benefit of the user’s bargain . . .
including . . .
pecuniary damage for inadequate value, the cost of repair and
replacement of [a] defective product, or consequent loss of profits,
without any claim of personal injury or damage to other property.”
In considering the purpose of the economic loss doctrine, the
court stated that it is to shield defendants from unlimited liability
for all economic consequences of a negligent act to keep the risk of
liability reasonably calculable. Further,
the court found that the purpose of the doctrine is furthered by
applying it to preclude the professional negligence claim at issue here
that involved geotechnical services.
In the case of Terracon
Consultants v. Mandalay Resort Group, 125 Nev. Adv. Op No. 8 (March
26, 2009), Mandalay Resort and Casino in Las Vegas entered into a
contract with Terracon Consultants whereby the consultant was to provide
geotechnical engineering advice about the subsurface soil conditions and
recommend a foundation design for the property.
Based upon its soil analysis and the anticipated weight of the
building, the consultant predicted a certain amount of settling and made
recommendations accordingly. Settling
exceeding what was anticipated and the County believed this presented a
potential danger to the resort’s structural integrity and therefore
required
Mandalay
to repair and reinforce the foundation before proceeding with
construction.
Mandalay
sued Terracon for damages alleging that it sustained damages as a result
of breach of contract, breach of covenant of good faith and fair
dealing, and professional negligence.
Terracon moved for partial summary judgment on the professional
negligence claim arguing that the claim was barred under the economic
loss doctrine. In opposition
to the motion,
Mandalay
argued the doctrine did not apply to negligence claims against design
professionals or contractors who solely provide services.
Previous decisions by the
Nevada
court have enforced the economic loss doctrine.
What the plaintiff sought here, however, was for the court to
determine that an exception to the doctrine should apply to allow
negligence-based actions against professionals that provide
design-related services in the commercial property development or
improvement process. In
deciding whether to make such an exception, the court analyzed the
policy considerations for the doctrine.
As explained by the court, “the doctrine expresses the policy
that the need for useful commercial activity and the desire to make
injured plaintiff’s whole is best balance by allowing tort recovery
only to those plaintiffs who have suffered personal injury or property
damage.”
When economic loss occurs as a result of negligence
in the context of commercial activity, the court states that “contract
law can be invoked to enforce the quality expectations derived from the
parties’ agreement.” Another
consideration behind the economic loss doctrine, explains the court, is
“balancing the disproportion between liability and fault…. To that
end, cutting off tort liability at the point where only economic loss is
at stake without accompanying physical injury or property damage
‘provides . . . incentives and disincentives to engage in economic
activity or to make it safer.’ On
the other hand, imposing
unbound tort liability for pure financial harm could result in
‘incentives that are perverse,’ such as insurance premiums that are
too expensive for the average economic actor to afford.
For these reasons, courts have been reluctant to impose tort
liability for purely financial harm.”
In conclusion, the court held that the economic
doctrine applied to preclude
Mandalay
’s professional negligence claim.
“Contract law is better suited to resolve professional
negligence claims” in the context of commercial activity engaged in by
architects and engineers. The
courts notes that “as in this case, contracting parties often address
the issue of economic losses in contract provisions.”
Significantly, the court concluded: “We perceive no significant
policy distinction that would drive us to permit tort-based claims to
recover economic losses against design professional, such as architects
and engineers, who provided their professional services in the
commercial property development and improvement process, when we have
concluded that such claims are barred under the economic loss doctrine
if brought against contractors and subcontractors involved in physically
constructing improvements to real property.”
One final point made by the court was that even if
the loss was allegedly foreseeable, “we do not read the rule as
necessarily being dependent on foreseeability notions.”
For the foregoing reasons, since
Mandalay
suffered only economic loss without any attendant personal injury or
property damage, the court held the economic loss doctrine barred
Mandalay
from proceeding with its negligence-based claim.
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Article
3
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Economic Loss Doctrine Enforced in
Indiana
to Prevent Property Owner Recovery against Design Professional for
Alleged Negligence and Negligent Misrepresentation
Indianapolis Public Library’s negligence
complaint against two engineering firms that were subconsultants to the
prime architect was held to be barred by the economic loss doctrine
because the alleged damages were purely economic and there had been no
personal injury or damage to property outside of the project.
Major voids were found in concrete beams and columns in a parking
garage under construction. The
Library sued the architect with whom it had a contract, and settled it
that suit. The Library then
filed a separate against the structural engineer, Thornton Tomasetti
Engineers (TTE), and also a small civil engineering firm, CCL, alleging
negligence had caused damages and expenses between $40 million and $50
million. CCL had been
retained to perform 12 site visits to determine whether the project was
in general conformance with construction standards.
CCL’s fee for services was only $12,000.
Neither TTE nor CCL were under contract to the Library.
They performed their services under subcontract to the prime
architect.
According to the court, the damages claimed by the Library arose
from repairs that were undertaken in the parking garage.
The court concluded: “[T]he various costs involving the project
delay settlements, additional construction management services, extra
architectural and engineering services, and legal fees, are all
consequential losses that arose from the issues related to the design
and construction of the project. Therefore,
it is apparent that the damages claimed by the Library are ‘economic
losses’ and are not recoverable in tort.”
In The Indianapolis-Marion
County Public Library v. Charlier Clark & Linard, P.C., and Thornton
Tomasetti Engineers, 2009 Ind. App. Lexis 183 (Feb 6, 2009), the
plaintiff sought to avoid the economic loss doctrine by arguing that it
should not be applied in cases where a plaintiff has a direct claim
against a design professional outside the realm of a contract, and where
the alleged acts and omissions cause an imminent risk of danger to the
safety of others. Further,
the Library argued that the doctrine should not apply where there are
allegations of misrepresentation, and it should not apply where the
defendant provides only services and not a tangible product.
The court addressed each of these arguments, beginning with a
basic explanation of the purpose served by the economic loss doctrine.
As explained by the court, “the economic loss doctrine has three
general purposes: (1)
to maintain the fundamental distinction between tort law and
contract law; (2) to protect commercial parties’ freedom to allocate
economic risk by contract; and (3) to encourage the party best situated
to assess the risk [of] economic loss, the commercial purchaser, to
assume, allocate, or insure against that risk.”
In
Indiana
, an “economic loss” includes, according to the court, consequential
losses, such as lost profits, rental expense, diminution in value, and
lost time. Damage to the
product itself, including costs of its repair or reconstruction, is an
economic loss even though it may have a component of physical
destruction.
The Library argued that the economic loss doctrine applies, at
most, to construction activities and not professional services. It
asserted that negligence claims should not be barred because a
structural engineer owes professional duties akin to those owed by
attorneys, accountants, and physicians.
In support of this argument, the Library cited a
Florida
case of Moransais v. Heathman, 744 So.2d 973 (
Fla.
1999) that held that negligence actions against “professionals” are
not barred under the economic loss doctrine.
That case concluded: “We also hold
Florida
recognizes a common law cause of action against professionals based on
their acts of negligence despite the lack of a direct contract between
the professional and the aggrieved party.”
The
Indiana
court rejected the reasoning of the
Florida
case and concluded “the claim brought by the Library against the
appellees with whom it was not in privity is precisely the type of
action that
Indiana
law does not support.” Further
the court cited other
Indiana
case precedent for the proposition that third parties that are not in
privity with a professional cannot recover in negligence unless certain
recognized exceptions or conditions exist.
One such exception to the economic loss doctrine is when an
architect creates a condition that is imminently dangerous to third
persons, and injury has resulted. That
exception does not apply to the situation at bar, however, since there
was no physical injury or damage to property.
According to the court, “there was no accident, injury, or
collapse of any structure on the property.”
The only possible physical damage would have been the destructive
testing on the structures and rip out of existing work.
These were not “natural occurrences of sudden harm caused by
defective design.”
In response to the Library’s question of whether it had to wait
until catastrophic failure of the garage before suing the design
professionals for negligence, the court responded that the answer is
“yes,” and that, “In our view, without recognizable personal
injury or property damage, the fact that the Library made repairs to
insure the structural integrity of the building is not relevant to the
Library’s negligence claims.” This,
however, did not compel the Library to wait for a catastrophic event
before doing repairs and suing those with whom it had a contract.
And that is precisely what the Library did when it repaired the
garage and sued the architect and others with whom it was in privity.
As far as the Library’s argument that claims
against the design professionals should proceed under a negligent
misrepresentation exception to the economic loss doctrine, the court
stated that no statutory or common law authority in Indiana recognizes
negligent misrepresentation allegations as an exception to the economic
loss doctrine’s applicability to traditional negligence claims.
In any event, the Library did not sue the design professionals
with a separate count based on negligent misrepresentation – they sued
solely for negligent performance of professional services.
For these reasons, the court affirmed the trial court’s grant
of summary judgment in favor of the design professionals.
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Article
4
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Economic Loss Doctrine was no bar to Negligence Action
against Design Professional in New York
In a New York case involving a collapsed retaining wall, a co-op
complex filed a complaint against a design firm that had been monitoring
and maintaining the wall, and that firm in turn brought a third party
action against another engineering firm (“MRCE”) that had several
years earlier designed and implemented certain corrective measures for
the stability of wall under a contract with N.Y. State Department of Law
and issued a report to the Department concerning the wall’s condition
which report was included in the public offering plan for the co-op.
During the course of its monitoring of the wall, the second
engineer recommended immediate remedial action because it found the wall
was moving rapidly and had visible cracks and.
Unfortunately, the wall collapsed before the recommended remedial
action could be taken. In
its third party action, the engineer sought contribution from MRCE –
and alleged in the complaint a list of specific bases for the complaint.
The appellate court affirmed the trial court decision
that the third party complaint met the state statutory requirements of
alleging a “substantial basis in law to believe that the performance,
conduct or omission complained of . . . was negligent….” An
expert affidavit was filed in support of the third party complaint.
The court also affirmed the trial court decision that MRCE
owed a duty of care to the co-op since there was a relationship between
them “approaching privity” even though there was no actual contract
between MRCE and the co-op. Finally,
the court affirmed that the engineer’s third party claim was not
barred by the economic loss doctrine, “since, as a design
professional, MRCE ‘may be subject to tort liability for failure to
exercise reasonable care, irrespective of [its] contractual duties.”
Castle Village Owners Corp.
v. Greater New York Mutual Insurance Company, 868 N.Y.S.2d 189 (Dec.
2008).
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ABOUT THIS NEWSLETTER & A DISCLAIMER
This newsletter Report is published and edited by J. Kent Holland,
Jr., J.D. The Report is independent of any insurance company,
law firm, or other entity, and is distributed with the understanding
that ConstructionRisk.com, LLC, and the editor and writers, are not
hereby engaged in rendering legal services or the practice of law.
Further, the content and comments in this newsletter are provided for
educational purposes and for general distribution only, and cannot apply
to any single set of specific circumstances. If you have a legal issue
to which you believe this newsletter relates, we urge you to consult
your own legal counsel. ConstructionRisk.com, LLC, and its writers and
editors, expressly disclaim any responsibility for damages arising from
the use, application, or reliance upon the information contained herein.
Copyright 2009, ConstructionRisk, LLC
Publisher & Editor:
J. Kent Holland,
Jr., Esq.
1950
Old Gallows Rd
Suite 750.
Vienna
,
VA
22182
703-623-1932
Kent@ConstructionRisk.com
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