What You Need to Know About Liability Clauses

Many architects and engineers incorporate a limitation of liability clause into their contracts. A limitation of liability clause is exactly what it sounds like: a clause that limits your liability in the event of a claim. Limitation of liability clauses establish “a contractual ceiling on the amount of damages to be awarded if a plaintiff prevails in later litigation between the contracting parties.” Therefore, a limitation of liability clause is a useful precautionary piece of armor to include in your contract.

By Sarah A. Johnson, Esq.

Many architects and engineers incorporate a limitation of liability clause into their contracts.

Limitations of liability are generally enforceable, especially in the construction context where the parties have bargaining power and are sophisticated. The most typical limitation of liability clauses include: (1) ones that limit the party’s liability to a certain specified amount; (2) ones that limit the party’s liability to the amount that they were paid for their services; (3) ones that limit the party’s liability to the amount of the party’s insurance limits; and/or (4) some combination thereof. These types of limitation of liability clauses are usually enforceable as long as they are not unconscionable and do not violate public policy or some other law.

Examples of limitations of liability clauses are as follows:

• The engineer’s total liability to you in connection with the work herein covered for any and all injuries, losses, expenses, demands, claims, or damages whatsoever arising out of or in any way related to the work herein covered, from any cause or causes, shall not exceed an amount equal to $__________;
• The owner agrees that, to the fullest extent permitted by law, the engineer’s total liability to the owner shall not exceed the amount of the total lump sum fee due to negligence, errors, omissions, strict liability, breach of contract or breach of warranty; and
• Liability for damages due to negligence in rendering services under this agreement shall be limited to the amount of its fee, but under no circumstances shall exceed the amount of any existing insurance coverage, less the deductible.

A limitation of liability clause is only valid if it is included in a valid written contract knowingly signed by the party who later seeks liability. Obviously, the more stringent the limitation, the more protection that the clause affords. It is likely that you will have to actively negotiate a limitation of liability clause with your client. Moreover, there will
be business considerations involved with the particular limitation of a liability clause that you choose to incorporate into your contract. For example, it may cause your client concern if you attempt to incorporate a limitation of liability clause that limits your liability to a very small amount in comparison to your fees or the value of the project. Thus, a certain amount of business acumen will be required for this type of negotiation.

¹ SAMS Hotel Group, LLC v. Environs, Inc., 716 F.3d 432, 436 (7th Cir. 2013) (applying Indiana law).

²Id. at 434.

³Arthur’s Garage, Inc. v. Racal-Chubb Sec. Sys., Inc. 997 S.W.2d 803, 807-09 (Ct. App. Texas 1999) (limiting the alarm installation company’s liability to $350).

⁴SAMS Hotel, 716 F.3d at 433; Zerjal v. Daech & Bauer Constr., Inc., 939 N.E.2d 1067, 1071 (Ill. App. Ct. 2010); Food Safety Net. Servs. v. Eco Safe Sys. USA, Inc., 147 Cal. Rptr. 3d 634, 642 (Cal. Ct. App.. 2012) (finding that limitation of liability clauses barring recovery of damages to the amount paid for services are enforceable).

⁵Food Safety Net, 147 Cal. Rptr. 3d at 642; c.f., Gessa v. Manor Care of Fla., Inc., 86 So. 3d 484, 493 (Fla. 2011) (finding that the limitation of liability clause placing a $250,000 cap on noneconomic damages and waiving punitive damages violated the public policy of the State of Florida where the clause contradicted a statute regulating nursing homes).

⁶SAMS Hotel, 716 F.3d at 439 (finding that when a contract between two sophisticated parties is freely and knowingly negotiated, the parties will be held to the terms of the contract).