Limitation of Liability Clauses: Are They Fair?

Bruce Jervis, Editor
Construction Claims Advisor

Limitation of liability clauses have gained wide use in professional service agreements, particularly among design professionals and construction managers. These clauses state that the consultant’s total potential liability to the client is limited to the greater of a stipulated amount, frequently $50,000, or the fee that was paid by the client.

The rationale for these clauses is that the liability exposure created by involvement in a construction project is disproportionate to the limited role of the consultant and the compensation it receives. Some contractual allocation of risk is in order.

These clauses have been repeatedly challenged in court, to little avail. The general rule is that they are enforceable if they were openly negotiated and not surreptitiously or unilaterally imposed. Artful scriveners have responded by placing the clauses in bold print and including a statement that the client may negotiate a higher limitation of liability amount for an additional fee.

That was the situation in a recent case out of Mississippi. The client, a general contractor, argued that the consultant, a testing laboratory, imposed the limitation as a precondition for doing business. How could that be, asked a federal court, when the clause itself invited negotiation of a higher limitation amount?

But are these clauses truly arm’s length transactions between commercial equals? Or are they imposed as a precondition to receiving specialized service? And are these clauses a rational allocation of risk or an attempt by professional service providers to avoid responsibility for their own work product? I welcome your comments.

Featured in Next Week’s Construction Claims Advisor:

• Prime Sanctioned for Violating Subcontracting Limitation
• Prime and Sub Never Agreed on Evolving Scope of Work
• Late Payment by Prime Contractor Not Justified by Lien Waiver Confusion

Comments

[jeramie rittiluechai]

My Architectural firm is small and the risk of a lawsuit hangs over us on every project. One lawsuit could put us out of business and it could be done without us doing anything wrong. The lawsuits that many of my colleagues are involved with are shotgun with everyone at the table. We spend the same amount of money on attorney fees but get paid the least at the table. I constantly have to sharpen my pencil on my fees and get blamed for the budget of the contractor. It is increasingly difficult to sustain a business where the clients don't want to pay the fees of our value than want to sue us for damages that exceed our gross income of the past three years. We have the same education levels and licensing requirements as Attorney's or Doctors but don't get compensated nearly the same. The limits of liability clause allows us to do our work knowing that we won't be run out of business by a mistake someone else did.

[Don Godi,FASLA]

Limits of liability are only fair to control undue claims.I see these differently than indemnification clauses that want you to be responsible for every mistake AND their legal fees when litigation gets started. Subconsultants are particularly vunerable if they want to eat and play the game.

[Dennis A. Ross AIA]

Not only are they fair, they are necessary. We have negotiated limitations (even if it's the amount of our insurance) for the last 20 years. The worst clause is one that is open-ended and has no limit whatsoever.

[Willard Bridgham]

In construction projects, the professional is asked to take a disproportionate share of the risk without participation in the profits of the project.
It is a sine qua non of investing that if you share the risk, you share the reward; this should apply to design professionals in construction projects.

[Aaron P]

As a structural engineering firm in California, the scope of our services consistently exposes us to a level of liability and risk that is much higher than most design consultants, given that our work can directly affect life safety. That said, our fees have never been remotely proportionate to this level of risk. In a tough economy, where owners are forcing design fees even lower, this situation is made even worse. It's unreasonable to ask that not only should our fees stay low, but that we should shoulder this liability without any recourse. The limit of liability is the only measure we have to level the playing field, to ensure that we can continue to offer our services at a competitive price without compromising our entire practice because of some frivolous claim. The thought that this practice is somehow unethical goes against all common sense. It's standard "risk versus reward". Pay us more and we'll gladly take more risk!

[Scott]

These all seem to be comments from a design professional's perspective. From an owner or investor's perspective we are placing trust and a fair fee in the hands of the design professionals that have creditials that would indicate we can count on you to know how to do your part right. Just like we all expect a surgeon to know how to perform a triple bypass surgery we all expect a Architect, Structural Engineer or Civil Engineer to know what they are doing as well but we have no way of checking your work or the surgeon's work. We just win or lose based on your efforts. If you die from an incompetent surgeon on a $20,000 surgery should they only be on the hook for $20,000 when you family loses their home and starves to death? That is a rediculous notion and so is this limited liability for design professionals. If people in general do thier jobs right they won't have anyone coming after them. If people do their job wrong and it negatively impacts someone else you should expect to be on the hook for whatever damage you have created. Charge more if you need to in order to take responsibility for your actions. No one is forcing you to take these jobs.

[D]

"If people in general do thier jobs right they won't have anyone coming after them." Scott, this is just flat out wrong. Lawyers will come after the design professionals just by nature of them having insurance; even if they have done nothing wrong. This happens all the time and is often the majority, if not the total, of claims for many design professionals. A real estate agent gets paid maybe 3% to 6% of the cost of a building to sell it with little liability while a structural engineer ballpark gets 1/2% of the building cost and takes huge liability. This is disproportionate. Owners won't pay more but want full liability protection. You can't have your cake and eat it too.