January 1, 1900

by Sean P. Mulligan

Most design projects or commercial undertakings include negotiating contracts that protect both parties' interests. Significant considerations include who will bear the burdens of risk involved in the project, the completion date and default remedies. Few parties consider placing a cap on the amount of damages that a party can recover in the event of a claim of negligence in the services provided by the design professional.

Limitation of Liability Clauses Have Been Upheld By The Courts

The design professional's potential liability regarding delay claims, related damages and damage to property or person may exceed hundreds of thousands or even millions of dollars. Much of this liability can be contracted away by using a limitation of liability clause. Limitation of liability clauses have been upheld by various state courts throughout the country. Traditionally, New Jersey Courts have upheld clauses limiting liability so long as the clause did not violate public policy and was clear in its terms, and the parties forming the contract had equal bargaining power. Public policy concerns generally focus on whether the amount of liability to which a claim against the design professional is limited is reasonable when compared to the work undertaken.

The leading case in New Jersey regarding the enforceability of limitation of liability clauses is Marbro v. Borough of Tinton Falls. In Marbro, the Township of Tinton Falls hired Fellows, Read & Associates (ãFRAä) to design improvements to a local park. Complications arose, and suit was filed by Marbro against the Township. The township in turn filed a third party complaint against FRA. FRA moved for summary judgment as to the amount of damages that could be recovered against it on the basis of a limitation of liability clause. The court granted the motion and limited the liability of FRA to the amount of its fee in accordance with the contract.

The court held that the limitation of liability clause was reasonable and did not violate public policy because the cap on damages was sufficiently high to motivate FRA to comply with its contractual obligations. In other words, the court would have voided the clause if the damage cap had been low enough to drastically minimize the consequences of a breach of the contract by FRA.

A Limitation of Liability Clause Can Be Used as Part of the Negotiation Process

Some construction parties will undoubtedly balk at the inclusion of a limitation of liability clause in their contracts. Certainly, business concerns will impact on how aggressively a professional should seek to include such a clause in its contract. However, even if a party refuses to include the limiting clause, it can be used as leverage in negotiating another concession or some other advantage. Nevertheless, experience has shown that many parties, including sophisticated business entities, have allowed design professionals to include limitation of liability clauses in their contracts. Not only does such a clause protect assets and insurance policies, it undoubtedly makes the design professional a less tempting target. A potential plaintiff will certainly seek redress more aggressively from a ãdeep pocketä than a design professional whose liability is limited to the amount of his fee.

Hill Wallack attorneys are experienced in drafting the proper contractual wording to safeguard the design professional in a manner that should be upheld by the courts. One simple clause is worth the effort to potentially save thousands of dollars.

Sean P. Mulligan is an associate of Hill Wallack where he is a member of the Litigation Division and the Construction Industry Practice Group. He concentrates his practice in the representation of architects, engineers and design professionals and their professional liability insurance carriers.