Three Wins for Limitation of Liability (LoL)

Three recent court cases upheld the validity of limitation of liability (LoL) clauses in design and construction contracts.

1) Oregon Courts Uphold One Sentence LoL Clause

The Oregon Court of Appeals upheld a Limitation of Liability clause in a contract between a design firm and its client.

In the case (Estey v. McKenzie Engineering, Inc.), the plaintiff contracted the engineering firm to conduct a "limited visual review" of a house he intended to purchase. The contract, a single page, four paragraph document that specified a fee of $200, contained a one sentence LoL clause in the third paragraph, which read:

"The liability of MEI (McKenzie Engineering, Inc.) and the liability of its employees are limited to the Contract Sum."

The plaintiff signed the contract and the services were performed. The defendant delivered a two-page written report, and the plaintiff purchased the house.

Soon afterward, problems with the house were discovered -- including a broken water pipe and slanted floors. The plaintiff hired another engineer, had repairs made to the house and sued the defendant for $340,000 for failure to detect the problems.

The defendant filed for a motion of summary judgment, which was granted by the trial court. The court concluded that the contract limited the defendant's liability for negligence. "The contract is extremely simple containing four short paragraphs," the court noted. "A reader would have to make a real effort for the limited liability clause to escape his or her attention."

The plaintiff appealed the decision, but the Oregon Court of Appeals affirmed the trial court decision.

2) Pennsylvania Court Upholds Unsigned LoL Clause

A U.S. District Court in Pennsylvania overruled a lower court decision and upheld a Limitation of Liability clause in an architect's contract that was not signed by the client (Valhal Corp. v. Sullivan Associates, Inc.).

In the case, a developer retained an architectural firm to perform a feasibility study on a parcel of land being considered for purchase for a high rise residential tower. The architect drew up a contract for the service which included an LoL clause that limited the liability for negligence to $50,000 or the firm's fee, whichever was greater. The developer was given the option of eliminating the LoL clause in exchange for paying a higher fee. Although the developer did not sign the contract, he read it and authorized, by a signed faxed letter, the architect to proceed with the services.

Following the study, the developer purchased the land -- but later discovered that the parcel was subject to a height restriction. He sued the architect for $2 million claiming breach of contract, negligence, gross negligence and negligent misrepresentation.

The architect moved for partial summary judgment based on the $50,000 limitation of liability. The U.S. District Court denied the motion, stating that the LoL clause was against public policy because it violated Pennsylvania's anti-indemnity statute. The case went to trial and a jury awarded the developer $1 million in damages.

The architect appealed, and the appellate court overturned the verdict. It ruled that LoL clauses are enforceable, writing:

"We are persuaded that limitation of liability clauses are not disfavored in Pennsylvania law; especially when contained in contracts between informed business entities dealing at arm's length, and there has been no injury to person or property. Furthermore, such clauses are not subject to the same stringent standards applied to exculpatory and indemnity clauses. Limitation of liability clauses are a way of allocating 'unknown or indeterminable risks'. . . and are a fact of everyday business and commercial life. So long as the limitation established is reasonable and not so drastic as to remove the incentive to perform with due care, Pennsylvania courts uphold the limitation.

"Because we have concluded that the limitation of liability is an enforceable part of the contract ...Valhal's maximum recovery is $50,000."

3) Massachusetts Court Says Contractor-Negotiated Clause Stands

In this case, a developer hired a contractor for a design-build project. The contractor, on behalf of the developer, hired a consultant to perform a preliminary site assessment (PSA) and geotechnical survey of the site. The contract for the services included a $50,000 or amount of fee (whichever is greater) LoL clause. The contract also stipulated that the client could increase the limit of liability in exchange for paying a higher fee for services.

The consultant performed the PSA and reported that no evidence of hazardous materials or oil was found in the soil or groundwater, but warned that an underground storage tank may exist. A year later, oil was discovered in the groundwater and soil on a portion of the site and the project was aborted. The developer filed suit against the consultant to recover damages, claiming that the LoL clause was invalid since 1) the developer did not authorize the contractor to sign the contract, and 2) the clause violated public policy.

A Massachusetts Superior Court upheld the LoL clause. It ruled that the contractor was indeed authorized to sign the contract as an agent of the developer, and that the LoL clause did not violate public policy.

The court concluded that "GZA's limitation of liability does not offend public policy. On the contrary, this contract arose out of a private, voluntary transaction in which one party, for consideration, agreed to shoulder a risk which the law would otherwise have placed upon the other party. Therefore, GZA's liability in this suit is limited to an amount not to exceed $50,000." (R-1 Associates, Inc., v. Goldberg-Zoino & Associates, Inc.)