A contract between an Engineer subconsultant and an Architect contained a limitation of liability clause stating that liability was limited to twice the amount of Engineer’s fee. When Architect sued Engineer for damages the project owner was awarded in arbitration, the trial court found the clause enforceable and dismissed the suit. This was reversed on appeal because the court found the clause was ambiguous due to the word “consequential damages” in the language. This didn’t make the clause void but it required the trial court to analyze the intent of the parties before making a judgment. Johnson Nathan Strohe, P.C. v MEP Engineering, Inc., 2021 WL 4314216 (Colorado 2021). The clause provided the following:
“Limitation of Liability: In light of the limited ability of the Engineer to affect the Project, the risks inherent in the Project, and of the disparity between the Engineer’s fees and the potential liability exposure for problems or alleged problems with the Project, the Client agrees that if the Engineer should be found liable for loss or damage due to a failure on the part of MEP-ENGINEERING, INC. such liability shall be limited to the sum of two thousand dollars ($2,000 or twice The Engineer’s fee whichever is greater) as consequential damages and not as penalty, and that is liability exclusive.”
The trial court concluded that the clause was clear and enforceable. In contrast, the Architect argued that the clause should be strictly construed in the same manner as an exculpatory clause and be held unenforceable due to ambiguity. The appellate court agreed with the Architect that the clause was ambiguous, but held that limitation of liability (LoL) clauses are not the same as an exculpatory clause and are not subject to the same rules of construction and invalidity as applies to those clauses. On remand, the court directed the trial court to “determine the meaning of the LoL provision, using traditional methods of determining disputed issues of fact.”
In arbitration with the project owner, $1.2 million in damages was awarded against the Architect. This was apparently due to defective design of heating and hot water systems by the engineer. The engineer was not included in the arbitration proceedings, because its contract apparently didn’t require it to participate. (Comment: It is important to require subcontractors to agree to participate in the same dispute resolution procedures that the prime has agreed to with regard to disputes involving project owners).
In the subsequent litigation against the engineer seeking recovery of the damages the Architect paid to the Owner, the Architect filed a motion for the court to determine the validity of the LoL clause. The trial court considered the motion and concluded:
“[T]he Court finds the parties entered into an agreement intending to allocate the risk of the project between them and to limit [the engineer’s] liability. The heading of paragraph five of the “General Provisions” document states in all capital letters – RISK ALLOCATION. This language is straightforward and obvious…. In addition, the phrase immediately below this heading is “Limitation of Liability.” Again, this language is straightforward and obvious and reflects the parties’ desire in no uncertain terms to limit the liability of [the engineer]….”
According to the appellate court, the trial court failed to review the LoL provision in its entirety. Specifically, the trial court should have analyzed the meaning of the words “consequential damages” in the clause. The court found as follows:
“One (but not the only) reasonable interpretation of the clause “liability shall be limited to … twice [t]he [e]ngineer’s fee … as consequential damages” is that the limitation only applies to consequential damages; it does not apply to other forms of damages. Another reasonable interpretation is that all damages caused by the engineer are consequential damages under the contract, for some unstated (and perhaps inexplicable) reason. Perhaps another interpretation is that the parties did not intend “consequential damages” to have its legal meaning, or that the use of the term was a simple mistake. But none of these interpretations are clear and unambiguous on the face of the contract.
Adding to the confusion is the clause “that is liability exclusive.” Read as a whole, “as consequential damages and not as penalty, and that is liability exclusive” could mean that the provision is the architect’s exclusive means of recovering consequential damages, while leaving other types of liability (say, for compensatory damages) unrestricted. In contrast, the district court interpreted “that is liability exclusive” to mean the provision is the exclusive means of imposing any liability against the engineer. This is a reasonable interpretation of the parties’ intent, but, as shown, it is not the only reasonable interpretation. The provision is therefore ambiguous.”
But the appellate court rejected the Architect’s argument that a LoL clause is subject to the same rules as an exculpatory clause. Unlike what would happen with an exculpatory clause, the ambiguity here did not make the LoL clause void.
“Exculpatory agreements are a complete bar to liability, so society’s preference for holding persons responsible for their negligence is completely negated. When “freedom [of contract] expresses itself in a provision designed to absolve one of the parties from the consequences of his own negligence, there is danger that the standards of conduct which the law has developed for the protection of others may be diluted.”[citation omitted]. Thus, “[a]greements attempting to exculpate a party from that party’s own negligence have long been disfavored.” [citation omitted.
In contrast, “[a] limitation of liability provision is generally enforceable.”[citation omitted]. Limitations of liability leave the benefiting party exposed to a bargained-for level of liability, as recognized by a division of this court … the clause in this case limited [defendant’s] total liability, it did not act as a waiver of any claim that [plaintiff] chose to bring.” Similarly, the New Mexico Court of Appeals concluded that “there is a significant difference between contracts that insulate a party from any and all liability and those that simply limit liability.”
In this instant case, the court concluded, “We hold that a limitation of liability in a commercial contract is not void merely because it is ambiguous. Like other ambiguous provisions, the meaning is a question of fact that courts must determine using ordinary methods of contract interpretation.”
Comments: It will be interesting to see what the trial court does with this clause on remand. I don’t recall ever seeing the words “consequential damages” used in an LoL clause. It might very well mean that the LoL clause was only intended to address consequential damages rather than direct damages. Many contracts include a separate Mutual Waiver of Consequential Damages clause. Some project owners agree to that clause but will not agree to an LoL clause. We like to include both clauses whenever possible. But in this subcontract, it is possible that the Engineer’s LoL clause was really just a waiver of consequential damages clause for those damages exceeding the dollar threshold set forth in the clause.
Many courts hold that an LoL clause must clearly state that it applies to damages caused by all specific types of causes of action – meaning that the clause should state that is is applicable to damages from “negligence, professional errors and omissions, beach of contract, warranty, and strict liability.” When our firm, ConstructionRisk, LLC, drafts LoL clauses for contracts, our template clause is the following:
“To the fullest extent permitted by law, the total liability, in the aggregate, of Consultant and its officers, directors, partners, employees, agents, and subconsultants, to Client, and anyone claiming through or under Client, for any claims, losses, costs, or damages whatsoever arising out of, resulting from or in any way relating to this Project or Contract, from any cause or causes, including but not limited to tort (including negligence and professional errors and omissions), strict liability, breach of contract, or breach of warranty shall not exceed the total compensation received by Consultant or $100,000, whichever is greater.”
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 ConstructionRisk 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 Report and may be reached at Kent@ConstructionRisk.com or by calling 703-623-1932. This article is published in ConstructionRisk Report, Vol. 24, No. 1 (January 2022).
Copyright 2022, ConstructionRisk, LLC