ConstructionPro Week, Volume: 1 - Issue: 9 - 07/05/2012

Limitation of Liability Clauses: Are They Fair?

By Bruce Jervis

 

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.

 

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