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Inside This Issue:

•  Limitation of Liability Clause Protecting Owner is Not Voided by Owner’s Breach of Contract or Alleged Bad Faith

•  Statue of Limitations for Negligence Instead of for Breach of Contract Requires Dismissal of Action against Architect

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ARTICLE #1
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Limitation of Liability Clause Protecting Owner is Not Voided by Owner’s Breach of Contract or Alleged Bad Faith

A Limitation of Liability (LoL) clause in a contract was upheld by a court notwithstanding allegations that the project owner had acted in bad faith in its treatment of the contractor.  It was held to apply, however, only to the damages that would be awarded under the contract and not to limit additional damages for interest, attorneys fees, and other costs that were imposed under state statute.

Where a painting contractor and the project owner, Sun Company, could not agree on inspection standards and whether the contractor’s paint stripping met the contract specifications, the contractor left the job and Sun eventually issued a letter to cancel the contract.  Sun offset its costs of re-procurement and completion of the paint job against the balance claimed by the contractor for work it had performed.  The contractor filed suit to recover the balance of what it thought was due for the work that had been performed.  The trial court trial court rejected Sun’s claim that any remedies were subject to the contract’s LoL clause because it found Sun had acted in bad faith.

In reviewing the matter, the appellate court stated that LoL provisions are not disfavored by the state and that such clauses are binding on parties unless they are unconscionable. Regardless of whether there was an unjustified breach of contract, the court explained that by their contract language parties may agree to waive remedies that they would otherwise have under contract law. The court’s decision suggests that this could be applied to both statutory and common law remedies if the LoL clause was clearly drafted to express that intent.

In determining the impact of Sun’s breach of its implied duty of good faith inspection on the contract’s other provisions (such as the LoL clause) the court reviewed the contract as a whole.  It found significant the fact that the contract contained multiple provisions permitting Sun to “terminate,” “cancel,” or “suspend” the contract at its sole discretion for any reason — or for no reason whatsoever.  The appellate court concluded that Sun had the right to terminate the contract and was not required, as the trial court had wrongly concluded, to try to work out with the contractor its dispute over the inspection and the quality of the work being performed.  Nevertheless, the court found that the trial court’s error was harmless in that the contractor was indeed entitled to recover its costs and fees under the contract – even as terminated, and that the award of the trial court had been within the amounts permitted under the LoL clause which limited contractor recovery to the total contract price. John B. Conomos, Inc. v. Sun Company, Inc., 831 A.2d. 696 ( Pa. 2003).

Risk Management Comment: The court’s discussion of the interpretation and enforceability of the LOL clause in the contract demonstrates several  points for consideration when drafting LOL clauses.  These clauses are often enforced even in the face of difficult facts or allegations when both parties are commercial enterprises as was the situation here.  The clauses can limit recovery that would otherwise be permitted under the law of the state but to do so, they must clearly express that intent.  In this case, the clause did not expressly state that interest and attorneys fees would be affected by the clause and the court declined to apply it to these remedies that were imposed by statute rather than by the contract.   As a general matter, it may be prudent to keep the LoL clause separate from an Indemnification clause.  Whereas state anti-indemnity statutes may restrict the use of an indemnification clause, the same statute might not restrict the use of an LoL clause.  A court that may be inclined to find an indemnification clause to violate public policy may be less likely to find fault with an LoL clause that parties bargained for and that only affects their rights as against one another.

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ARTICLE #2
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Statue of Limitations for Negligence Instead of for Breach of Contract Requires Dismissal of Action against Architect

A professional liability claim against an architect was governed by a three-year statute of limitations applicable to non-medical, professional malpractice rather than the six-year statute for actions based on breach of contract.  Regardless of whether the alleged failures of the architect were a breach of contract, they arose out of alleged malpractice.  Actions to recover damages for malpractice were required by New York law to be commenced within three years regardless of whether the underlying theory is based in contract or negligence.

In this case the allegations were that the architect failed to comply with fireproofing requirements of the Connecticut Building Code applicable to a commercial building being designed and built in Stamford , Connecticut .  Almost four years after the building was completed and occupied, the building owner brought a demand for arbitration against the architect. (Although the project was located in Connecticut , the contract apparently specified that New York law would be applied.)

In denying the architect’s motion to dismiss the action based on the three year statute of limitations having elapsed, the first court (motion’s court) concluded that the plaintiff Owner was entitled to the six-year statute for breach of contract because it was contending in its suit that the architect completely failed to perform its specified contractual responsibility and not that the architect committed malpractice.  In reversing that decision, the appellate court stated that “whether [architect’s] alleged failure to comply with the applicable code provisions was a breach of contract or tortious [i.e., negligent] in nature is immaterial for statute of limitations purposes, since the resulting non-compliance is the same, as is the remedy sought.”  The court went on to find that the New York Legislature’s intent was that this type of action be subject to the statute of limitations for professional malpractice.  A Legislative Memorandum supporting certain clarifying amendments to the statute of limitations was quoted by the court stating that it was “the legislative intent that where the underlying complaint is one which essentially claims that there was a failure to utilize reasonable care or where acts of omission or negligence are alleged or claimed, the statute of limitation shall … be three years … regardless of whether the theory is based in tort or in a breach of contract.”  R.M. Kliment & Frances Halsband, Architects v. McKinsey & Company, Inc., 770 N.Y.S. 2d 329 (2004 WL 57074 (2004).

Comment: This case demonstrates the importance of specifying in the contract what law will govern.  Will it the law of the state where the project is built or where the architect is domiciled, or even where the project owner maintains its principal office?  The outcome of a case can be dramatically altered by that decision.  To clarify when a cause of action accrues for the purpose of measuring the time for filing action, there is much to be said for specifying that date in the contract, for example as the date of substantial completion of construction.  The time periods can be further clarified by contractually agreeing to a specified number of years following substantial completion in which a suit or demand for arbitration may be brought.  This can avoid completely disputes such as this one over how to interpret state statutes of limitations.

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ABOUT THIS NEWSLETTER & A DISCLAIMER

This newsletter Report is published and edited by J. Kent Holland, Jr., J.D., a construction lawyer and risk management consultant for environmental and design professional liability.  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.

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