A Legal Look

November 1, 2004
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There is one sure way to limit your liability as a land surveyor: don't make any mistakes. Since none of us can follow this sound piece of advice, let's explore a few other options. Three areas of business where you can make significant strides towards limiting liability are: (1) the form of the organization, (2) insurance and (3) contract. Smart planning and utilization of all three can provide the greatest amount of protection.

Business Organization

Since this isn't a business column, I'll leave the details of how to form an organization to others who are better equipped to provide advice on those specifics. For our present discussion, however, it is important to review some of the advantages and disadvantages of certain business organizations. Sole proprietorship, for example, is absolutely the easiest and fastest way to get into business, but it also entails the greatest amount of personal liability. Whatever mistakes are made or obligations are taken on, they will come back to the owner personally. This doesn't mean that a sole proprietor can't get insurance to provide some protection; it just means that there is no "corporate shield" between the owner and the liabilities he or she takes on as a business.

Most if not all states have passed some form of Limited Liability Company (LLC) legislation. LLCs are fast becoming the choice of small business. This is because they are fairly easy to form and operate, and they afford that corporate shield from personal liability. But, an LLC is not a corporation. It is a company and it does have the look and feel of a sole proprietorship or partnership organization. In fact, if you are in business by yourself, the only significant difference between a sole proprietorship and an LLC (besides some mandatory paperwork) is the liability protection that the LLC affords. As with a corporation, the LLC will protect you from personal liability associated with the business. The reality is, however, that many small business owners have everything wrapped up in the business anyway. If they lose the business, it's little consolation that they have been spared personal liability.

Corporations are easily the most complex form of business, but they probably afford the most personal liability protection. The biggest problem with the corporate model, at least for most small firms (like many surveying firms), is the complexity of the organization. There must be officers and directors, as well as formal corporate meetings, minutes and a corporate book. Everyone working for the corporation must be an employee. And there is double taxation-the corporation is taxed on its profits and the employees are taxed on their wages. Corporation requirements include numerous files, paperwork, tax payments, W-2 forms, matching funds, corporate reports, audits, and so on and so forth. However, from a liability protection standpoint, a corporation will usually give you more personal protection because there are generally more assets. The ratio of your personal stake in the corporation is usually much lower. Absent fraud on your part, the laws of agency-in which you work on behalf of someone else, such as a corporation entity-will work in your favor even on licensing issues. And the structure of the corporation usually affords many more opportunities for checks and balances to help keep you out of trouble in the first place!

Piercing the Corporate Veil

Of course there are several problems with the liability protection afforded by a business. First, a business organization will not be able to provide much protection from a licensing board if something goes wrong from a professional standpoint. Much personal liability is attached to the license to survey. However, as I said, the laws of agency may provide some protection here, especially with issues where the corporation is involved. Another problem with small businesses is that, oftentimes, the owners treat their businesses as an extension of themselves. In other words, they dispense with the formalities of the business-such things as corporate minutes, stockholders meetings, boards of directors and corporate officers. And they will also treat the corporate bank account like a personal checkbook. This practice is so frequent that a formal name for the phenomena has been created: the "Alter Ego Doctrine."

"The figurative terminology "˜alter ego' and "˜disregard for the corporate entity' is generally used to refer to the various situations that are an abuse of the corporate privilege"¦ The equitable owners of a corporation, for example, are personally liable when they treat the assets of the corporation as their own and add or withdraw capital from the corporation at will"¦; when they hold themselves out as being personally liable"¦; or when they provide inadequate capitalization and actively participate in the conduct of corporate affairs..."[1]

"[A] corporate entity will be disregarded and the veil of limited liability pierced when two requirements are met: first, there must be such unity of interest and ownership that the separate personalities of the corporation and the individual no longer exists; and second, circumstances must be such that adherence to the fiction of separate corporate existence would sanction a fraud or promote injustice."[2]

Insurance

The second option business owners have for applying some liability protection is through insurance. For all specific purposes, I'll leave it to the insurance experts to provide details about insurance. I will, however, discuss some of the ups and downs of having or not having insurance. Obviously, having insurance protection, be it general liability or errors and omissions, will afford business owners some protection from a catastrophic event. No insurance is going to completely protect owners from harm (especially financial harm); any such protection would be cost-prohibitive for most of us in this line of work. But, even if you physically survive an event, you will still need to make a living, so you'll want your business to survive as well.

Insurance coverage, however, can include high premiums, high de-ductibles to be paid when a claim is made, and the loss of control to defend the owner. All policies are a little different and include or exclude certain things from coverage. Some of these differences are in direct relation to the amount the owner is willing to pay for the coverage. However, most errors and omissions policies will contain a statement similar to the following:

We have the right and duty to defend any claim against you seeking amounts that are payable under the terms of this policy, even if any of the allegations of the claim are groundless, false or fraudulent. We will designate or, at our option, approve counsel to defend the claim. We are not obligated to defend any suit or pay any amounts after the applicable limit of our liability has been exhausted.

So the risk owners continue to face, even with insurance, is that the truly catastrophic event can still put an end to their business because premiums, deductibles and other requirements can be expensive when policy limits have been met. Little claims may also put owners out of business. After insurance companies defend owners on numerous groundless claims, premiums may rise to levels that make insurance unaffordable. Or, in some cases, owners are dropped altogether. (Perhaps here is where we need to go back to discussing not making any more mistakes.)

Contracts

Mistakes are often made not from what you do, but what you didn't do. This is probably the single most important reason for having a contract. The vast majority of the cases I have read where the surveyor was sued start with miscommunication. The surveyor was under one impression of the work to be done and the client was under another. A contract, even in the form of a simple letter agreement, will go a long way toward clarifying the amount of work you are going to do and how much you are going to do it for. If your contractor/client is under the impression that you are going to keep providing grade stakes until he's finished grading, but you are under the impression that you are only going to provide two sets, at best you're heading for an argument, at worst a lawsuit. Who really wants either one?

Exculpatory Clauses

An exculpatory clause in a contract is any clause that releases a party from liability for his or her wrongful act. The clauses take on many forms and can be found in almost any part of a contract. The favorite exculpatory clause of engineers and surveyors is one that limits the amount of liability to a certain sum. These clauses usually read in a similar fashion to the following:

The parties hereby agree to limit liability under this contract, for all claims, losses, costs, damages of any nature whatsoever or claims of expenses from any cause or causes, so that the surveyor's total aggregate liability shall not exceed [the amount]. Such claims and causes include, but are not limited to negligence, professional errors and omissions, strict liability, or breach of contract.

I've seen these clauses in contracts and I've seen them actually printed on the face of the survey itself. Whether or not they are valid depends on many factors. "Each exculpatory clause deserves independent review based on many considerations. Foremost in any review is the language of the exculpatory clause and whether it applies to the instant case. Other factors include, but are not limited to: how the exculpatory limits liability, intent of the parties, and the manner in which the exculpatory clause was made a part of the agreement."[3]

One type of exculpatory clause that has been found to be illegal in case after case across the country is one that is against public policy. "Exculpatory contracts are not favored by the law because they tend to allow conduct below the acceptable standard of care applicable to the activity. Exculpatory contracts are not, however, automatically void and unenforceable as contrary to public policy"¦ Rather, a court closely examines whether such agreements violate public policy and construes them strictly against the party seeking to rely on them."[4]

The court in this case went on to explain that a tension exists in all exculpatory agreements between the "freedom of contract" and the "law of torts." Among the factors considered by the courts to determine if an exculpatory contract is against public policy, and therefore invalid are: if the party invoking exculpation possesses a decisive advantage in bargaining strength; how standardized adhesion contracts are used; and if no other provision or protection against negligence exists.[5] The court added that "none of these factors alone would necessarily have warranted invalidation of the exculpatory contract [but that] a combination of these factors" caused the court to overlook the principles of "freedom of contract" in favor of "tort law" to compensate the wronged party.

"Under Florida law, "˜[c]ontractual provisions by which a party seeks exculpation for his own negligence, although not favored in the law, have been upheld as not violative of public policy where the contract is between persons of equal bargaining power and the provisions are clear and unambiguous.'"[6]

"The Alabama courts have consistently held that "˜the right of freedom of contract is a cherished one that courts are bound to protect,' and they are reluctant to hold contracts unenforceable on the basis of public policy unless they are clearly illegal."[7]

Most commentators agree that an exculpatory clause in a contract, freely bargained for and agreed to by the parties to the contract, is not violative of public policy and will be enforceable. What makes such a clause freely bargained for and agreed to by the parties? Burying the clause deep in the fine print probably would not do it. Setting the clause out in bold letters and/or requiring the initials of the parties to the contract would certainly show that this clause was freely bargained. Also, limiting your liability to the amount of the survey fee will tend to get the clause thrown out. A better alternative would be to set the limitation to coincide with your limits of liability insurance. If you have $500,000 in errors and omissions coverage, it is recom-meded to set the limit at $500,000. This will serve two purposes: it will probably be seen as a reasonable clause in your contract, and it will protect you from the catastrophic event that (as we have seen) insurance will not cover.

Three Ways to Limit Liability

At the beginning of this article I said that we would explore three areas of a business where significant strides towards limiting liability could be made. Some would argue that there is a fourth area: to have excellent people who are highly trained and proficient. This is certainly true, but it really goes back to my first statement, "Don't make any mistakes." And since it is a foregone conclusion that mistakes will be made, no matter how highly trained you and your personnel are, you would be well served to look at these three areas of your business. The right business model, coupled with an adequate amount of insurance for the type of work you do, and complemented by correct contract language, will provide you with even more protection than simply not making any mistakes.

Neither the author nor POB intends this column to be a source of legal advice for surveyors or their clients. The law changes and differs in important respects for different jurisdictions. If you have a specific legal problem, the best source of advice is an attorney admitted to the bar in your jurisdiction.

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