Construction Law

Design Contract’s Enforceability of Limitation of Liability Provisions

By John P. Ahlers

Designers often seek to minimize their legal liability on a project by negotiating limitation of liability (LOL) clauses in their professional contracts.  An LOL clause in a design contract seeks to cap a design professional's liability for professional negligence at some specified dollar amount, often the amount of the designer's fee.  The recent trend is for courts to uphold these clauses as long as those LOL clauses are consistent with public policy and are clearly written.

A real estate developer (Ocotillo), commenced development of a townhouse project in Phoenix, AZ on a parcel of property bounded on one side by the Arizona Canal.  Ocotillo hired a surveying firm (WLB).  The contract between Ocotillo and WLB contained a provision limiting WLB's liability for negligence to fees actually paid to WLB under the contract which amounted to $14,242.  The contract language read as follows: 

Client agrees that the liability of WLB . . . resulting from any negligent acts, errors and/or omissions of WLB . . .  is limited to the total fees actually paid by the client to WLB for services rendered. 

WLB surveyed the property and although the survey accurately showed the property boundaries, the surveyor failed to demarcate the right-of-way owned by the Arizona Canal.  WLB prepared both the improvement drawings and the final plat on the basis of its erroneous survey.  The Arizona Canal contested the final plat and the City of Phoenix refused to issue construction permits for the project.  Once the right‑of‑way was properly depicted, Ocotillo had to hire additional engineering and survey firms to redesign the site layout and property improvement to obtain construction permits for the project. 

The developer sued the surveyor for breach of contract and professional negligence.  Before the trial, the surveyor asked that the court declare, as a matter of law, that the LOL provision in its contract was enforceable to cap its liability.  The court held that the LOL clause was valid and ruled any damages due the developer for professional negligence would be limited to the amount Ocotillo actually paid to WLB under its contract with WLB.

The developer appealed the ruling to the Arizona Court of Appeals, contending that the LOL provision was contrary to Arizona's anti-indemnification statute which prohibits parties from shielding themselves from liability for negligence that is wholly theirs.  The court found that the LOL provisions merely capped the amount of liability and do not exonerate the offending party from liability and, therefore, are valid and enforceable.  In its ruling, however, the court did further hold that a jury must decide the issue of the enforceability of an LOL provision since the Arizona constitution states that any defense by a party concerning "its assumption of risk" is a question of fact that should in all cases be decided by a jury.  The court found this argument persuasive and remanded the case to a lower court so that a jury could decide the issue. 

The benefit of a LOL clause is not just that it caps liability, it also allows the design professional to avoid proceeding in a lawsuit by tendering the amount of the cap to the plaintiff.  The Arizona decision was very costly to the surveyor, since it made it impossible for the survey firm to avoid a jury trial.  Even if the jury ultimately decides now to enforce the clause and cap the surveyor's liability at $14,242, the legal fees incurred by the surveyor or its insurance carrier to achieve that outcome, may well dwarf that amount.   1800 Ocotillo v. WLB Group, 217 Ariz. 465, 176 P. 3d 33 (2008)

Full post as published by Construction Law Blog on May 11, 2008 (boomark / email).