Limitation of Liability
I. What’s at stake?
A limitation of liability clause is a contractual provision used to limit a design professional’s risk. Limitation of liability provisions can
be negotiated into a contract to establish the maximum liability a design professional will be responsible for to its client, usually the
owner, on a project. As a result, the owner essentially takes on the risk of liability in excess of the agreed-to liability amount. When
enforceable, a limitation of liability provision is an effective risk management tool for a design professional.
II. Key issues
Parties. As the design professional is taking on a risk (e.g., defending a large claim) that is usually in excess of the reward (e.g., the
design fee for a project), the design professional is the party for which the provision provides protection. Make sure that the
language provides that liability is limited for the design professional, its officers, directors, partners, employees and subconsultants
in order to limit any pass through or individual liability claims. As the owner is assuming the risk in excess of the agreed-to limitation,
you will likely need to initiate negotiations with the owner to obtain this provision in your contract.
Claims. The scope of the limitation of liability clause should be as broad as possible to cover various types of claims. Depending upon
the language in the limitation of liability provision, you can limit your liability for claims, fees, losses, expenses, injuries and damages
arising out of the project or the contract between you and the owner that result or arise from your negligence or breach of contract.
If the claims are not specifically itemized, a court could determine that only certain parts of the claim are covered by the limitation
of liability provision. In many cases, attorney fees could be substantial in defending a claim even where there is an enforceable
limitation of liability provision. Incorporate defense costs into the limitation of liability provision for additional protection.
Amount. Liability is often limited to the design professional’s fee received on the project, available insurance proceeds, or some
other stipulated amount of money or re-performance of the services that allegedly gave rise to the claim/damages.
Consequential Damages. As a specific type of limitation of liability, a waiver of consequential damages shields the design
professional from the owner’s non-direct damages such as loss of revenue, loss of use or other economic loss resulting from the
design professional’s negligence and/or breach of contract. This waiver should be included in projects that rely heavily on a stream
of commerce such as casinos, hotels and retail stores or malls.
Enforceability. Some states have enacted statutes that limit or prohibit the enforceability of limitation of liability provisions. Be sure
to check the state laws governing your contract to determine if the limitation of liability provision is enforceable.
III. Negotiating points
Scope. Depending on the flexibility of the owner, the design professional can negotiate the scope of the limitation to provide some
limiting language in the contract. As most design professionals do not have substantial assets beyond their intellectual property, and
recovery from individuals or design firms would likely be cumbersome, many owners are willing to negotiate a liability limit equal to
available insurance proceeds. While limiting the liability to your design fee is likely better, any limiting provision is better than none.
Risk/Reward. When negotiating a limitation of liability provision with your client, explain the risks and rewards to both parties. In all
projects, the owner receives the long-term financial benefit of the project, whereas the design professional receives a one-time fee
that is often small in relation to the design professional’s risk. If your client is not willing to provide a limitation of liability provision,
require additional fees to assume the full design risks on the project. In many instances, this requirement may prompt your client to
reassess the limitation of liability provision.
Reasonableness. The limitation of liability must be reasonable with respect to the value of the services provided. Risk Management PLUS+ Online®
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Consideration. The provision must have been freely negotiated by parties with relatively equal bargaining power. The party against
whom the limitation of liability clause is being enforced must not have been in the situation where they were powerless to negotiate
the clause. In negotiating the provision, make sure the provision is highlighted and/or somehow sticks out in the contract so that
your client cannot argue that it was “hidden” within the contract. Also, leaving the amount of the limitation blank until an amount is
officially agreed to, and then putting that number in bold, may be used as evidence to show that the limitation amount was agreed
upon and/or negotiated.
Exceptions. Even in those states that do enforce the provision, most courts will not uphold the clause if the damages arose out of
gross negligence, fraud or are otherwise “unconscionable.”
IV. Risk transfer considerations
Third Party Claims. Limitation of liability provisions are only enforceable between the contracting parties. For example, if a third
party brings a claim against the design professional, the limitation of liability is not enforceable as to the third-party’s claim.
Out of Scope Work. In many projects, the design professional may provide services outside the contract without an official
amendment or supplement. If the language of the limitation of liability provision merely covers “services arising out the contract,”
the additional services may not be covered by the limitation of liability provision and any claim relating to these additional services
could face unlimited liability.
State Law. These provisions are not enforceable in every state. Some states have restrictions on enforceability of the clauses. Many
require that they are clear and unambiguous and they will be enforced only to the extent they are “conscionable.” Courts will look to
the contract to determine if the provision is reasonable and was freely negotiated by parties with relatively equal bargaining power.
Check state statutes and common law for requirements regarding the enforceability of these provisions.
Just Say No. On certain projects that inherently have increased risk, such as condominiums, hazardous materials, renovations and
certain subsurface projects, remind your client that you cannot provide a reasonable and competitive fee that allows you to accept
the risks of a substantial claim without some sort of protective provision in place.