Everyone Needs A Good Limitation Of Liability Clause, DD 9/07

Defense Digest

The old adage that an ounce of prevention is worth a pound of cure may never have been truer than as when applied to the context of contract drafting. Limitation of liability clauses in contracts for design professional services provide an excellent means to proactively protect a professional from exposure to future liability for damages. While not relieving professionals from performing in accordance with the applicable standard of care, a limitation of liability clause presents the means for parties to a contract to allocate and apportion among themselves the risks inherent in any construction project. If a dispute arises and litigation ensues, enforcing the limitation of liability clause should be at the forefront of the defense strategy. Proper wording of the clause is vital because, as beneficial as such a clause may be, a limitation of liability clause is worthless if the language is not enforceable in court.

No magic language will unequivocally immunize a limitation of liability clause from challenge. However, Florida courts have been willing in many cases to uphold contract clauses limiting liability. By examining cases where such clauses have been found enforceable, specific characteristics emerge that every good limitation of liability clause should possess.

Employing standard rules of contract interpretation, the language purporting to limit liability should be clear and unequivocal. If the clause does not specifically indicate that claims based on professional negligence are covered, precedent varies by Florida jurisdiction as to whether such negligence will be found to be covered. Engineers, architects, and surveyors are well-served by incorporating language expressly limiting the liability for negligence and professional errors. The monetary cap on liability should be set at a reasonable amount as compared to the overall contract amount. For example, many clauses tie the liability limit to the amount of compensation the professional receives for his services, up to $50,000. A limitation at that amount is reasonable, conscionable, and also has the attribute of defeating federal court diversity jurisdiction when enforceable. Limitation of liability clauses are more likely to be upheld when the parties to the contract are sophisticated entities or otherwise have equal bargaining power. Finally, and perhaps most importantly, a truly good limitation of liability clause must include an option to increase the liability limit in exchange for additional consideration. That is, the clause should allow the purchase of a higher cap on liability. Making the limitation amount increasable tends to demonstrate equal bargaining power and protects against a finding that the contract clause is unconscionable and void.

Beware that even the most carefully drafted limitation of liability clause has its own limits. An important note is that limitation of liability clauses are inapplicable to a claim brought by a third party, such as a personal injury action brought by a motorist injured in a construction work zone. Since the clause derives its authority from the contract, only parties bound to that contract are bound by its terms. As a result, such a clause offers no protection from third party claims. Claims of professional negligence may not be covered if not specifically identified in the clause. Depending on the jurisdiction in Florida, a limitation of liability clause that does not expressly state that acts of negligence are covered may or may not be extended to cover negligence. Employees, subcontractors, and agents whose actions could reasonably and foreseeably give rise to the liability should be expressly covered as well so no ambiguity exists. In this manner, a plaintiff cannot attempt to litigate around the limitation provision that protects the company by also naming employees or professionals in their personal capacity.

The Jacksonville, Florida, office of Marshall, Dennehey, Warner, Coleman & Goggin recently proved the benefits of a carefully crafted limitation of liability clause when a judge entered partial summary judgment in favor of the client-engineering firm, limiting the engineers' liability in accordance with the contractual provision. The case involved a dispute between a developer and the engineer in a contract for professional services related to a residential development. The contract for engineering services contained a provision that clearly purported to limit the liability for the engineering firm, its officers, directors, partners, employees, agents, and subconsultants. The clause expressly applied to causes of action including, but not limited to, negligence, professional errors or omissions, strict liability, breach of contract or warranty, express or implied. The clause capped liability as the lesser amount of $50,000 or the total compensation received by the engineers. Finally, the clause included an option that the developer could increase the limit up to $500,000 upon written request and for an additional charge. The developer never exercised this option to increase the limitation, and when the dispute arose, the developer claimed damages far in excess of $50,000. Because the skillfully drafted limitation of liability clause included all the elements described above, Marshall, Dennehey's attorneys successfully argued the clause was valid and enforceable.

Given the potential for changed conditions and unanticipated delays that can create financial risk in construction projects, a smartly drafted limitation of liability clause is an invaluable tool to protect engineers, architects, and surveyors when litigation arises. If written to be clear and comprehensive, such clauses are fully enforceable in Florida courts. As a rule of thumb, when it comes to construction litigation in Florida, everyone needs a good limitation of liability clause!

*Tom Roberts is a shareholder in the Jacksonville, Florida, office, and is also a Registered Professional Engineer. He can be reached at (904) 358-4215 or rtroberts@mdwcg.com.  Jennifer. Bowmar is a summer associate in the Jacksonville, Florida, office, and a third year law student with a degree in civil engineering.