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A design professional was granted summary judgment enforcing a $50,000 limitation of liability (LoL) clause and waiver of consequential damages clause in its contract with its client, the design-builder. Although this amount was only eight (8) percent of the designer’s fee of $665,000, the court found this didn’t violate public policy as being too nominal an amount. In affirming the summary judgment, the state Supreme Court explained the state’s law did not allow parties to contract away all liability, but here the LoL clause capped damages without exempting or exculpating the designer from all liability – and it therefore did not violate the state law.

With regard to whether the amount was too nominal, the court noted that prior to additional services being assigned to the designer, the LoL constituted 40 percent of the originally agreed upon fees. “The failure of [the contractor] to address or renegotiate the limitation of liability clause during the execution of each addendum has made the term of the contract more burdensome than previously anticipated…. This court is unwilling to allow [contractor] to avoid a term of the contract simply because it has become more burdensome due to its own failure to renegotiate.”

Comment: The court well explains the principal of freedom of contract and the importance of honoring the mutually agreed upon terms of a contract even if those terms turn out to be burdensome or one sided. Zirkelbach Construction, Inc. v. DOWL, LLC, 389 Mont. 8 (Montana 2017).

The contract clause in question provided as follows:

“D. Consequential Damages/Limitation of Liability

To the fullest extent permitted by law, DOWL HKM and Client waive against each other, and the other’s employees, officers, directors, agents, insurers, partners, and consultants any and all claims for or entitlement to special, incidental, indirect, or consequential damages arising out of, resulting from, or in any way related to the Project and agree that DOWL HKM’s total liability to Client under this Agreement shall be limited to $50,000.”

The contractor filed suit against its design subcontractor claiming that due to the designer’s negligence and breach of contract, the contractor incurred $1,218,197.93 resolving problems caused by the designer’s design plans.

With regard to the issue of freedom of contract the court quoted from a number of earlier court opinions as follows:

“The fundamental tenet of modern contract law is freedom of contract; parties are free to mutually agree to terms governing their private conduct as long as those terms do not conflict with public laws.” (citation omitted). “This tenet presumes that parties are in the best position to make decisions in their own interest.” (citation omitted). “A contract must be so interpreted as to give effect to the mutual intention of the parties as it existed at the time of contract, so far as the same is ascertainable and lawful.” Section 28-3-301, MCA; Mary J. Baker Revocable Trust, ¶ 21. “To permit the avoidance of a written contract because the terms of the contract now appear burdensome or unreasonable would defeat the very purpose of placing a contract into writing.” (citation omitted).

Further comment: It is frustrating when plaintiffs’ attorneys attempt to convince the court that a valid limitation of liability clause is actually an exculpatory clause that violates public policy. They are essentially asking the court to change the bargain and throw out the contract terms their client freely entered into of their own accord. Trying to get out from under the LoL clause demonstrates a failure to take responsibility for one’s own decisions made during contract negotiation and formation. It is therefore always refreshing to see appellate courts, particularly state supreme courts, honor the principle of freedom of contract and restrain themselves from revising a contract to apply their own sense of what the parties should have negotiated.

 

About the author: Article written by J. Kent Holland, Jr., 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 founder and president of a consulting firm, ConstructionRisk, LLC, 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. 20, No. 2 (Feb 2018).

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