Published in the Idaho Business Review, March 2008 
 

Many times construction contracts contain provisions that, if not addresseed, can affect the signing party's ability to collect damages after an event.  Imagine this scenario:  You have been presented with a contract from a design professional.  You carefully review the scope of the work to make sure it reflects the agreement reached.  You check and double check the payment terms, the dates, and the temination rights. You think the contract looks pretty good.  However, buried in the legal boilerplate of the "Miscellaneous" clauses at the end of the contract is a provision limiting the design professional's liability. 

            Limitation of liability provisions are relatively common in contracts with design professionals and other consultants, such as environmental and geotechnical consultants.  Provisions limiting liability are found under different headings in contracts, such as the self-explanatory “Limitation of Liability”, the less obvious “Remedies on Breach”, hidden within an “Indemnification” provision, or sometimes under no heading at all.  Such a limitation of liability provision may be phrased similarly to the following:  “Consultant shall indemnify, defend, and hold harmless Owner from and against all losses, damages, or claims arising out of the performance of the Work; provided, however, in no event shall Consultant’s liability exceed the Contract Price.”         

            Limitation of liability provisions seek to limit a party’s liability to either a specified amount (such as the contract price) or exempt a party from liability for certain types of damages (such as consequential damages or damages arising out of the party’s ordinary negligence).  Limitation of liability provisions are essentially a risk-allocation tool, apportioning the liability for unknown and unforeseeable types of damages between the parties.           

            In Idaho, contractual provisions limiting the liability of a party are generally enforceable.  When parties have challenged such provisions in lawsuits, courts have analyzed them under the “freedom of contract” theory - which states that people are free to enter into whatever type of contract they choose.  So long as a limitation of liability provision is clearly drafted and not ambiguous, the parties have relatively comparable bargaining power and sophistication, and the contract does not involve a “public duty,” most courts will enforce the provision.           

            An enforceable limitation of liability provision will limit the other party’s exposure for the damages you sustain.  The following hypothetical example illustrates the effect of a limitation of liability provision:  You hired an architect to design your building, and you have paid the architect $40,000.00 for his design services.  Five months after completion of construction, a wall collapses damaging the interior of the building and necessitating substantial work to repair the structure.  Your damages are $100,000.00.  You go to court and succeed on your claim that the architect negligently designed the wall, and the court agrees that you suffered damages in the amount of $100,000.00.  Your contract with the architect, however, contains a provision that caps the architect’s liability at the contract price of $40,000.00.  Finding that both you and the architect are sophisticated parties in the construction arena, that the limitation of liability language is clear, and no public duty is involved, your judgment against the architect is limited to $40,000.00.           

            A limitation of liability provision has the potential to leave you unable to recover the full amount of your future damages.  Therefore, it is important for parties to review carefully such a provision in the context of a specific project.  Have you worked with this professional in the past?  Does the professional have a good reputation?  Be sure to analyze the risk involved.  For example, insurance may afford coverage for the risk.  If the contract limits your remedy against a professional to the contract price, but the risk of loss from a particular professional’s work is low, then your exposure to damages may be sufficiently limited so as to avoid negotiations over the provision.           

            Limitation of liability clauses may underline the significance of the reputation of the particular professional with whom you are contracting and the importance of your review and analysis of the provision.  You may wish to consult with your attorney to define the effects of the provision and to analyze the potential risk.  In addition, you may wish to consult with your insurance advisor to determine whether particular policies or endorsements are available for additional protection on your project.  
 

Maureen Ryan is an associate with the law firm Meuleman Mollerup LLP.  She represents businesses and individuals with legal problems and concerns involving contracts, construction, and real property matters.  Ms. Ryan can be reached at 208.342.6066, or at This e-mail address is being protected from spam bots, you need JavaScript enabled to view it .; more information at www.lawidaho.com