Limitation of Liability Clause in Engineer’s Contract Enforced in Georgia
An engineering firm performed soil studies and rendered an opinion on the suitability of using septic systems in a residential subdivision being developed by its client. The client sued the engineer on the basis of allegedly inaccurate conclusions. The engineer successfully moved for summary judgment to enforce a limitation of liability (LoL) clause in its contract. According to the Georgia Court of Appeals, the clause was a reasonable allocation of risk negotiated between two companies with equal bargaining position and it was not contrary to public policy or any state statute.
In the case of RSN Properties, Inc. v. ECS, Ltd., 686 A.E.2d 853 (Ga.App. 2009), the LoL clause provided as follows:
"[RSN] agrees to limit ECS's liability to [RSN] arising from ECS's professional acts, errors or omissions in performing this Agreement, such that the total aggregate liability of ECS to [RSN] shall not exceed $50,000 or the value of services rendered, whichever is greater."
In analyzing the law and facts, the court stated:
"We find no statute that prohibited ECS from contracting with a real estate developer to limit its liability to the developer for professional engineering services. Compare Precision Planning v. Richmark Communities, 298 Ga.App. 78, 80, 679 S.E.2d 43 (2009) (no statute prohibits professional architect from limiting liability to developer). Professional engineers are subject to statutory regulation which requires adherence to rules of professional conduct and practice designed to protect the safety, health, and welfare of the public. OCGA § 43-15-1 et seq. Nevertheless, the public policy expressed in these regulations was not violated by the limitation of liability provision in the contract between ECS and RSN. In this case, a real estate developer (RSN) and an engineering firm (ECS)-parties in relatively equal bargaining positions in a commercial setting-contracted for the provision of professional engineering services necessary for a residential development. On a contract for ECS to perform $2,200 of engineering services related to the development, the parties exercised business judgment in agreeing to limit ECS's liability to RSN for engineering errors to no more than $50,000. Generally, inclusion of a limitation of liability provision in a contract of this nature recognizes that the fee for the service is small compared to the substantial liability which could arise from an error in providing the service. The provision reflects an arms-length bargain to perform the service at the agreed-upon fee in return for the liability cap. The limitation of liability provision did not release ECS from liability for its engineering errors. ECS remained liable to RSN for its errors up to $50,000. Nothing in the contract exculpates, holds harmless, or otherwise limits ECS's liability to third parties. [citation omitted]. Although the limitation of liability provision capped ECS's liability to RSN, ECS remained substantially responsible for its professional errors and retained the incentive to perform engineering services with due regard for the safety, health, and welfare of the public. [citations omitted]. Under these circumstances, we find that the limitation of liability provision in the contract represented a reasonable allocation of risks in an arms-length business transaction, and did not violate the public policy….”
Comment: This case seems to finally end any uncertainty in the state of Georgia concerning the availability of limitation of liability clauses to establish a reasonable allocation of risk between design professionals and their clients. The clause in this case applied only to claims by the client against the design professional. It did not attempt to limit liability arising out of third party claims. Nor did it attempt to eliminate or avoid responsibility and liability altogether. It thereby avoided the confusion noted by other recent cases in Georgia where the LoL clauses attempted to apply to third party claims and thereby potentially run afoul of the state anti-indemnity statute.
In this suit for over $100,000, the engineer’s fee was only $2,200. The LoL clause wisely limited liability to the greater of the amount of the fee or $50,000. The fact that an engineer agrees to be subject liability many times greater than its fee can be useful in demonstrating the reasonableness of the LoL clause. When the fee is small, it is possible that a court might consider that amount as too nominal or inconsequential to establish a reasonable LoL. Establishing a reasonable threshold amount such as $50,000 or some other reasonable amount below which the LoL will not fall may make the LoL clause less vulnerable to successful challenge.
J. Kent Holland, Jr. is 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 – including assistance with contract drafting, review and negotiation; change order and claims analysis (preparation or defense); risk management advice concerning insurance coverage – including assistance with negotiating and drafting the terms and conditions of policies and endorsements, advice to insurance underwriters; guidance to those procuring insurance; change order and claim preparation, analysis and defense; contract preparation; contract review and contract negotiation. Mr. Holland is publisher of ConstructionRisk.com Report and may be reached at Kent@ConstructionRisk.com or by calling 703-623-1932.
From 1982 through 1986, he was an attorney in the Office of General Counsel of the U.S. Environmental Protection Agency, with responsibility for assisting the Agency in deciding wastewater treatment construction grants disputes, contractor claims, bid protests, suspension and debarment matters and minority business enterprise matters.
Mr. Holland is a frequent speaker for groups such as the American Bar Association and the International Risk Management Institute on the subjects of environmental law, insurance law, and construction law, with a special emphasis on risk management for design professionals and contractors. He has written several books, including Risk Management & Contract Guide for Design Professionals (2006); Construction Law & Risk Management - Case Notes and Articles, (Vol. I, 2003 and Vol. II, 2006)); Architectural/Engineering Contracts Risk Management Guide (1997); and EPA Construction Grants Disputes: Surviving the Audit (1990). He has also has written chapters in several manuals and books for publishers including, Wiley Law, Aspen Law, and International Risk Management Institute (IRMI). He co-authored and edited Construction Contractor’s Environmental Risk Management Procedures Manual for the Associated General Contractors Association of America (AGC). He has taught a Federal Publications course titled The Environmental Liabilities of Government Contractors and Agencies.
Mr. Holland publishes a web-based construction risk management library and legal newsletter at http://www.ConstructionRisk.com. He is a 1979 graduate of the Villanova University School of Law.