Limitation of Liability Clauses in Construction Contracts
Construction contracts exist between three chief parties: the property owner, the general contractor, and the architecture / engineering design firm. Disputes can exist between owners and contractors for faulty construction, or between owners/contractors and designers for faulty design. “Limitation of liability” clauses are chiefly used by designers to shield themselves from liability from owners, but can also be used by general contractors.
The main contested issue with limitation of liability clauses is their enforceability. Generally, architects owe a duty to owners to draft defect-free plans. Contract law does not look favorably on “indemnity” agreements, where the owner releases the designer from all liability. However, a number of states allow reasonably drafted limitation of liability clauses (while a number completely reject them).
A commonly enforceable limitation of liability provision holds the designer liable up to $50,000 or their fee, whichever is greater. However, designers often try to add additional protections such as: including attorneys’ fees within the $50,000, reducing the amount for low-risk projects, including the negligence of employees and subconsultants, and indemnifying against claims by subsequent owners, homeowners’ associations, and contractors. Some of these added provisions may work in some states, but other states may strike these clauses down as indemnity clauses.
Furthermore, in order to be enforceable, the limitation of liability clause must clearly state the intent of the parties. It must be located in a conspicuous place in the contract with a noticeable heading – not buried in complicated legalese. Furthermore, parties must have equal bargaining power and sophistication. Both parties must be free to negotiate the contract – not have it presented to them on a take-it-or-leave-it basis. Attorneys for owners will argue that it was not the owner’s intent to limit the designer’s liability to merely her fee – that is like saying, “If my building falls down, you won’t get paid.” In reality, much more money than the architect’s fee will be owed.
Third parties are generally not covered by a limitation of liability clause, because they did not sign the contract. Thus, actions for personal injury because of defective design or construction are not prevented by these clauses – only property damages are limited.
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Last Modified: 08-09-2011 03:46 PM PDT
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