Source: http://www.constructionrisk.com, February 2011
By: J. Kent Holland, Jr.
A Limitation of Liability clause (LoL) in a contract was upheld by a court notwithstanding allegations that the project owner had acted in bad faith in its treatment of the contractor.  It was held to apply, however, only to the damages that would be awarded under the contract and not to limit additional damages for interest, attorneys fees, and other costs that were imposed under state statute.

Details

Where a painting contractor and the project owner, Sun Company, could not agree on inspection standards and whether the contractor’s paint stripping met the contract specifications, the contractor left the job and Sun eventually issued a letter to cancel the contract.  Sun offset its costs of re-procurement and completion of the paint job against the balance claimed by the contractor for work it had performed.  The contractor filed suit to recover the balance of what it thought was due for the work that had been performed.  The trial court trial court rejected Sun’s claim that any remedies were subject to the contract’s LoL clause because it found Sun had acted in bad faith.
In reviewing the matter, the appellate court stated that limitation of liability clause provisions are not disfavored by the state and that such clauses are binding on parties unless they are unconscionable. Regardless of whether there was an unjustified breach of contract, the court explained that by their contract language parties may agree to waive remedies that they would otherwise have under contract law. The court’s decision suggests that this could be applied to both statutory and common law remedies if the limitation of liability clause was clearly drafted to express that intent.
In determining the impact of Sun’s breach of its implied duty of good faith inspection on the contract’s other provisions (such as the limitation of liability clause) the court reviewed the contract as a whole.  It found significant the fact that the contract contained multiple provisions permitting Sun to “terminate,” “cancel,” or “suspend” the contract at its sole discretion for any reason — or for no reason whatsoever.  The appellate court concluded that Sun had the right to terminate the contract and was not required, as the trial court had wrongly concluded, to try to work out with the contractor its dispute over the inspection and the quality of the work being performed.  Nevertheless, the court found that the trial court’s error was harmless in that the contractor was indeed entitled to recover its costs and fees under the contract – even as terminated, and that the award of the trial court had been within the amounts permitted under the limitation of liability clause which limited contractor recovery to the total contract price. John B. Conomos, Inc. v. Sun Company, Inc., 831 A.2d. 696 ( Pa. 2003).

Risk Management Comment on Limitation of Liability Clause

The court’s discussion of the interpretation and enforceability of the limitation of liability clause in the contract demonstrates several  points for consideration when drafting LOL clauses.  These clauses are often enforced even in the face of difficult facts or allegations when both parties are commercial enterprises as was the situation here.  The clauses can limit recovery that would otherwise be permitted under the law of the state but to do so, they must clearly express that intent.  In this case, the clause did not expressly state that interest and attorneys fees would be affected by the clause and the court declined to apply it to these remedies that were imposed by statute rather than by the contract.   As a general matter, it may be prudent to keep the LoL clause separate from an Indemnification clause.  Whereas state anti-indemnity statutes may restrict the use of an indemnification clause, the same statute might not restrict the use of an LoL clause.  A court that may be inclined to find an indemnification clause to violate public policy may be less likely to find fault with an LoL clause that parties bargained for and that only affects their rights as against one another.
About the author: Article written by J. Kent Holland, Jr.,  a construction lawyer located in Tysons Corner, Virginia,  with a national practice (formerly with Wickwire Gavin, P.C. and now with Construction Risk Counsel, PLLC) representing design professionals, contractors and project owners.  He is founder and president of a consulting firm, ConstructionRisk, LLC, providing consulting services to owners, design professionals, contractors and attorneys on construction projects.  He is publisher of ConstructionRisk.com Report and may be reached at Kent@ConstructionRisk.com or by calling 703-623-1932.  This article is published in ConstructionRisk.com Report, Vol. 6, No. 4 (May 2004).