The following is a re-post from the Southeast Construction Law Blog:
Contractors, subcontractors, and A&E firms all face differing levels of liability on construction projects. Managing that exposure is a key to maintaining profitability and ensuring your business is protected.
One issue I consistently see in my practice is companies taking too much liability for their scope of work on a project. For example, what should the liability of a subcontractor be who has a small $25,000 subcontract on a $15 million project? Should the subcontractor be liable for any and all damages?
Many subcontract agreements state that subcontractors are responsible for “any and all costs” caused by a subcontractor’s delay or interference with any portion of the work. While each party should be liable for damages it causes, this determination is never as clear as it seems.
General contractors (and sometimes owners) often control the timing, means, and methods of how a subcontractor performs its work. In those situations, it is difficult for me to explain to a subcontractor that it is liable for everything it does on site. Even so, many subcontractors’ feet are held to the fire for delay costs in the hundreds of thousands or millions of dollar range when their contract was initially very small.
Architecture and engineering firms face a similar dilemma. Many times A&E firms are brought into lawsuits in the millions of dollars when their scope of work may have been small. I have seen a civil engineer sued for $12 million when it performed a $1,600 staking job on a project.
In addition, A&E firms face a different challenge. Even if an architect or engineer prevails on the claim, the A&E firm has likely spent thousands of dollars in attorney’s fees, all chargeable to the A&E under the deductible in the Professional Liability Insurance policy.
One way to manage this risk is to develop your system for contract negotiation. Your system should include a procedure by which you request for a limitation of liability which is reasonable in relation to your scope of work. If the owner or general contractor will not accept a reasonable limitation of liability, then that is a factor you will need to consider in your bid or proposal.
Limitation of liability clauses are “typically” enforceable (although not to the same extent in every jurisdiction). Many A&E firms and subcontractors design these clauses to state that they shall not be liable for more than a given sum as a result of any error or omission committed. The sum chosen is usually related to the scope of work on a project or, at the most, the limit of insurance coverage.
However, limitation of liability clauses are not fool proof. They are only effective against the other party to a contract. A third-party, such as an injured worker or a condominium homeowner’s association, will typically not be bound by these limitations of liability clauses.
However, limitation of liability clauses are extremely useful in helping you manage your contract risks. Below is a summary of southeastern States’ positions on limitation of liability clauses:
1. Alabama – Limitation of liability clauses are generally valid and enforceable as long as the terms are not “unconscionable.” Fleming Farms v. Dixie Agricultural Supply, 631 So. 2d 922 (Ala. 1994); AL Code § 7-2-718 and 719.
2. Tennessee – Limitation of liability clauses are generally valid and enforceable as long as not “unconscionable.” Perez v. McCloskey, 872 S.W.2d 897 (Tenn. 1994).
3. Georgia – Limitation of liability clauses are enforceable, but closely scrutinized. Monitronics International, Inc. v. Veasley, Case No. A13A0090 (Ga. Ct. App. July 16, 2013).
4. Florida – Limitation of liability clauses are enforceable (however, you have to be sure it includes individual design professionals, not just the design professional’s entity). Witt v. La Gorse Country Club Inc., 35 So. 3d 1033 (Fla. 3d Dist. Ct. App. 2010).
5. South Carolina – Limitation of liability clauses generally enforced. Purvis v. Consolidated Energy Products Co., 674 F.2d 217 (4th Cir. 1982); S.C. Code Ann. § 36-2-719.
6. Arkansas – Generally upholds limitations of liability absent unconscionability. Graham v. The City of Cave City, 709 S.W. 2d 94 (Ark. 2000); Ark. Stat. Ann. § 4-2-719.
7. Mississippi – Generally upholds limitations of liability clauses as long as they were fairly and honestly negotiated. Turnbough v. Ladner, 754 So. 2d 467 (Miss. 1999).
Blog Love: Though relatively new, the Southeast Construction Law Blog has impressed us with its active, timely subject matter. Hats off to the blog’s author, Burns Logan of Lloyd, Gray, Whitehead & Monroe, P.C. We received permission to re-post this piece from Burns Logan, and we recommend you follow his blog today.