Limiting Your Liability
April 29, 2009
No one wants to take on more liability in a project than absolutely necessary. When you’re providing a limited scope of services for a limited fee, it might seem logical to include a limitation of liability clause in your contract. However, these clauses are among the most controversial provisions that you can seek to include in your client agreements. What’s more, they might not even hold up in court.
For surveyors and other professionals, the threshold under tort law at which liability will be imposed is generally higher than that imposed on a nonprofessional. The indemnity obligation for professional liability is typically unlimited. Limitation of liability provisions are a form of contractual language that either allocates a risk or transfers the obligation to correct damage caused by one party to another party.
These provisions can be useful, especially when the risks faced are not in line with the limited scope of services provided by the surveyor, the surveyor’s limited fee and the client’s potential for profit. Under a limitation of liability, the surveyor stands behind the professional services but not beyond a point that bears no reasonable relation to the compensation received for rendering those services. For example, the surveying firm may limit the liability exposure to any of the following options: 1) the firm’s fee; 2) available insurance proceeds; or 3) direct damages, typically through a waiver of consequential damages. However, such limitations require more than a simple clause in the contract.
The Courts and the Contract
Courts have held that the intent to limit the liability must be clearly spelled out in the contract and must be unambiguous. To determine whether a limitation of liability provision should be enforced, the courts may examine the contract for factors such as the clarity of the language, the intent of the contractual parties and the effects of the limitation upon public policy.
A limitation of liability provision is not a silver bullet for several reasons. First, the provision will not generally protect the design professional from liability arising out of intentional, reckless or grossly negligent conduct. Second, the provision is only effective against the client, not third parties. Third, some states look at limitation of liability provisions as another form of indemnification for negligence and will not enforce them.
For evidence of the last point, one need only look to the Georgia Supreme Court and its 2008 ruling on the case of Lanier at McEver, L.P. v. Planners & Engineers Collaborative Inc. Contractor Lanier at McEver (Lanier) hired civil engineering firm Planners & Engineers Collaborative (PEC) for design services in the construction of an apartment complex. In the contract, the two parties agreed to a provision limiting PEC’s liability as follows:
In recognition of the relative risks and benefits of the project both to [Lanier] and [PEC], the risks have been allocated such that [Lanier] agrees, to the fullest extent permitted by law, to limit the liability of [PEC] and its sub-consultants to [Lanier] and to all construction contractors and subcontractors on the project or any third parties for any and all claims, losses, costs, damages of any nature whatsoever … so that the total aggregate liability of [PEC] and its sub-consultants to all those named shall not exceed PEC’s total fee for services rendered on this project.
After completion of the project, damages arose that were attributed to PEC’s design. Lanier expected costs for repairs to come in around $500,000 and sued PEC for negligent design and breach of warranty. PEC sought to invoke the contractual agreement limiting its liability to its fee, which was $80,514. The trial court granted the motion, and this was affirmed by the Court of Appeals.
Lanier appealed this decision to the Georgia Supreme Court, where the decision was overturned and the clause invalidated. The court ruled that the provision violated Georgia’s public policy by contracting away liability that arose out of one party’s sole negligence. The clause above did not only restrict the limitation to claims brought by the client but also covered third-party claims. The court felt that shifting the liability above PEC’s fee to Lanier, regardless of the claim’s origin, violated a long-standing principle that any provision where a building contractor waives liability for property damages resulting from the sole negligence of its agents or employees is void and unenforceable.
For a contradictory take on limitation of liability clauses, consider the North Carolina case of Blaylock Grading Co. v. Smith. Blaylock Grading Co. (Blaylock), a contractor, hired Neal Smith Engineering (Smith) to provide land surveying services. The contractual agreement included a clause limiting liability as follows:
[Smith’s liability to Blaylock] for any and all injuries, claims, losses, expenses, damages or claim expenses arising out of this agreement, from any cause or causes, shall not exceed the total amount of $50,000, the amount of [Smith’s] fee (whichever is greater) or other amount agreed upon when added under Special Conditions.
In its services, Smith set the bench marks for the project higher than was specified forcing Blaylock to raise the elevation of the site. Blaylock filed suit against Smith for negligence, and, as with PEC in Georgia, Smith moved for partial summary judgment based on its contractual provision limiting damages to $50,000. The trial court denied the motion and later held the provision as void and against public policy. Smith appealed to the North Carolina Court of Appeals, which overturned the decision and upheld the provision.
The change was based on two factors. First, while land surveying services are regulated by statute and surveyors must be licensed, that does not necessarily lead to the conclusion that the profession is a public service. Second, the provision only limited the liability of Smith to the economic loss of Blaylock, not Smith’s liability to third parties.
According to the court, the health and safety of the public was not at issue and avenues still existed for recourse from a third party due to bodily injury or property damage. As the provision was negotiated in good faith between two sophisticated parties, it was upheld.
Similar results arose from the case of 1800 Ocotillo, LLC v. The WLB Group, Inc. in Arizona. 1800 Ocotillo (Ocotillo) was a real estate developer that hired The WLB Group (WLB) for surveying, engineering and landscape architecture services on a townhouse project in Phoenix. The contractual agreement included the following limitation of liability provision:
[Ocotillo] agrees that the liability of WLB, its agents and employees, in connection with services hereunder to the Client and to all persons having contractual relationships with them, resulting from any negligent acts, errors, and/or omissions of WLB, its agents and/or employees is limited to the total fees actually paid by [Ocotillo] to WLB for services rendered by WLB hereunder.
In its survey, WLB did not accurately identify an existing right-of-way resulting in the city of Phoenix refusing to issue construction permits. Ocotillo then had to hire other firms to make adjustments to accommodate corrections to the survey. Ocotillo filed suit against WLB, and the trial court found the limitation of liability provision to be unenforceable due to it being against public policy. WLB filed a second motion for partial summary judgment regarding the provision, and the court reversed itself finding the provision to be enforceable. The Arizona Supreme Court upheld this ruling, also finding the provision to be enforceable and not in conflict with public policy. In its discussion of the case, the court stated, “To be enforceable, however, there must be ‘no public policy impediment to the limitation,’ the parties must have bargained for the limitation, and the provisions must be strictly construed against the party seeking its enforcement.” As in North Carolina, an important factor is that the limitation of liability was only for direct damages to the client; it did not apply to or limit third-party claims, which could be against public interest.
What’s the Rule?
As evidenced by these three cases, there is no prevailing rule for how limitation of liability clauses will be handled by courts. Each state will view limitation of liability provisions differently. Generally, the courts have upheld clauses that are limited to the fee for professional services or the amount of insurance available when the claim is settled, but limitation of liability clauses are challenged all the time. For a clause to be effective and enforceable, it appears that it should meet the following criteria:
• The language allocating risk must be unambiguous;
• The types of risk being allocated must be clearly defined;
• The contractual agreement must be freely bargained;
• The limitation is clearly a release from direct claims only and an assumption of risk for third-party claims; and
• The retained risk bears some logical relation to the scope of services.
Due to the ever-changing nature of these provisions, surveyors should consult with a local attorney regarding the validity and enforceability of a limitation of liability provision in the applicable jurisdiction.