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ConstructionPro Week, Volume: 1 - Issue: 28 - 11/12/2012

Are Limitation-of-Liability Clauses Used Fairly?

By Bruce Jervis

 

Limitation-of-liability clauses have become popular among engineering professionals. These clauses state that the engineer’s liability to the client or any other party relying on the engineer’s work product is limited to the amount of the engineer’s fee or a stipulated amount, whichever is greater.

 

In a recent case, an engineer’s proposal to a contractor capped damages at $25,000. The limitation clause was conspicuous; it was underlined and in capital letters. The contractor signed the proposal but then issued a purchase order stating the engineer would indemnify the contractor against any claims arising out of the engineer’s negligence. The engineer didn’t sign the purchase order but made no objection.

 

After project completion, the contractor was forced to correct problems allegedly caused by the engineer’s negligence. When the contractor demanded compensation from the engineer, the contractor’s recovery was limited to $25,000. The limitation-of-liability clause in the proposal, in effect, trumped the indemnification clause in the purchase order.

 

Is there any sympathy for the contractor in this situation? After all, the limitation clause was clear and conspicuous. The contractor knew what it was signing. Or, did the contractor reasonably believe its purchase order would negate the limitation clause? More fundamentally, is it reasonable for a design professional to limit its liability in this manner? I welcome your comments.

 

COMMENTS

An architect or engineer's E&O insurance (if they carry it) will limit what liability they can take on, so that has a significant impact on what contracts they will agree to. If a contract is uninsurable, it's bad for both parties. Most design firms are relatively small compared to construction firms, and don't carry much, if any, capital assets. All of the money goes out to payroll or facilities. If a large settlement was made against a firm that insurance wouldn't cover, then the only asset it can pay with is the firm itself. Owners and contractors who want unlimited liability have to ask themselves: do they really want to own an architecture or engineering business, and therefore only "win" all of the liability for every other project that this firm is engaged in? The only reasonable recourse for gross negligence against a registered A/E is to take the insurance, and lodge a complaint against them with the State Board of Technical Registration, with hopes they are censured or have their registration revoked. Sorry, but we have no money!
Posted by: Chuck - Thursday, November 15, 2012 5:49 PM


I believe most architects/engineers carry professional liability insurance. The contractor should have required it as part of their contract/PO with the A/E firm and should have been smart enough to know NOT to sign the A/E's proposal but have the A/E sign the contractor's PO.
Posted by: Phil L - Thursday, November 15, 2012 5:54 PM


As an architect, I would prefer that the liability limit apply to all claims, including 3rd party. Unfortunately, that is not the case. But in the situation cited, the claimant is the contractor who retained the professional as a sub-contractor, similar to electricians and masons.
Posted by: Martin Safren - Thursday, November 15, 2012 5:54 PM


Of course, what is "fair," like beauty, is in the eye of the beholder. From the designer's perspective, consider the following -

As between the Owner, Contractor and A/E, who should bear the most risk? While one can argue with and manipulate the numbers, especially in these economic times, the little mathematical exercise below will still serve its purpose here:

Owner: $10,000,000 buildingx 3.1% return/year x 30 years economic life = $25M (wanted a nice round number and 3% is my "eyeball approximation" of the rate of inflation since somethinng like 1913 based on an Internet search I did some time back on the subject)

Contractor: $10,000,000 building x 5% profit = $500,000

A/E: $10,000,000 building x 7% fee = $700,000 x 10% profit = $70,000

Now, as simple as this illustration is, it suggests to me that the A/E will generally receive the smallest project benefit as between the A/E, the Contractor, and the Owner. Hence, at least in part, the reason why A/E's feel justified in seeking to negotiate a limitation of liability in their contracts.

Fair? Depends on what chair one is sitting in and when the opinion is being given (i.e., at the start of the project, in the midst of the project, or when the lawsuits start flying).

If the contractor wanted greater protection, then he could have suggested and agreed to pay for a project-specific PLI policy and let the project carry the financial burden. (Yes, that may have made his price non-competetive.) Even if the A/E carries a PLI practice policy, there is no guarantee that the coverage will not have been significantly reduced, or even exhausted, by other claims when the contractor's E&O claim hits. As Chuck notes, what benefit is there to the contractor to drive the A/E into a foreclosure sale on the steps of the courthouse?

And, in fact, at the end of the day, every contract, in effect, has an associated LoL - unless he has the ability to print money, there is always a limit to what one will be able to recover from someone else. So, why not make a reasoned business judgment between yourself and the other party at the start and then live with your decision?
Posted by: James - Thursday, November 15, 2012 7:42 PM










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