Three ways to limit your liability

by Erik Missio | May 26, 2015 1:07 pm

LAW
Werner Sabo, FAIA, CSI, and Shawn Goodman
Design professionals face significant liability from a variety of sources. Minimizing this exposure should be on the minds of all architects and engineers when drafting contracts. This article examines three ways to lower one’s liability exposure to a client:

• limiting the amount the client can recover if you have breached the contract or are found negligent;
• limiting liability to the firms and not the individual employees and officers; and
• shortening the statutes of limitation and repose.

Before delving into this topic, the authors offer a word of caution—one should always consult an attorney familiar with the laws of the jurisdiction where the project is located when the contract is being prepared. Each state has different laws and those laws can change from time to time. In other words, what follows is not legal advice, but something to consider when negotiating with a client.

1. Limitation of liability
The idea is to limit the amount of recovery a client can receive in the event of a claim against the design professional. It is important to note a limitation of liability is effective only as to the client and not as to third parties. This means if a worker is injured at the project site, the limitation of liability will have no effect. However, if the client sues you because you delayed the project, then it could protect you by limiting your exposure.

There are two general strategies for this type of limitation. You can limit your exposure to:

• a certain dollar amount (e.g. the amount of your fee); or
• the amount of insurance available.

For the first option, you might consider adding a sentence to your contract such as this:

It is agreed that the developer will limit any and all liability for any damage on account of any error, omission or other professional negligence to a sum not to exceed $50,000 or the amount of the fee, whichever is greater.

(This comes from Precision Planning v. Richmark, 679 S.E.2d 43 [Ga. App. 2009], where the court held the architect’s limitation of liability clause did not violate a statute or public policy.)

In a case where the owner claimed $4.2 million in losses due to the architect’s poor services, the following contractual provision that resulted in a limit of $70,000 in damages was held to be valid:

The Owner agrees that to the fullest extent permitted by law, [Architect’s] total liability to the Owner shall not exceed the amount of the total lump sum fee due to negligence, errors, omissions, strict liability, breach of contract or breach of warranty.

(This comes from Sams Hotel v. Environs, 716 F.3d 432 [7^th Cir. 2013].)

Other courts have refused to uphold similar attempts to limit a design professional’s liability. For instance, in a Georgia case—McEver v. Planners, 663 S.E.2d 240 (Ga. 2008)—the court held this provision violated public policy (there was a dissenting opinion):

In recognition of the relative risks and benefits of the project both to [Lanier] and [PEC], the risks have been allocated such that [Lanier] agrees, to the fullest extent permitted by law, to limit the liability of [PEC] and its sub-consultants to [Lanier] and to all construction contractors and subcontractors on the project or any third parties for any and all claims, losses, costs, damages of any nature whatsoever, or claims expenses from any cause or causes, including attorneys’ fees and costs and expert witness fees and costs, so that the total aggregate liability of PEC and its sub-consultants to all those named shall not exceed PEC’s total fee for services rendered on this project. It is intended that this limitation apply to any and all liability or cause of action however alleged or arising, unless otherwise prohibited by law.

Today, it appears most courts will enforce a reasonable limitation of liability provision in a contract between the design professional and the owner so long as the limitation is reasonable and the parties had an opportunity to negotiate that provision. A limit of $10 is unlikely to be upheld, while a limit of the amount of fees is likely to pass muster.

Owners may be more comfortable with a limitation if the limit is tied to insurance. For instance, the first provision quoted above might be amended to read:

It is agreed that the developer will limit any and all liability for any damage on account of any error, omission or other professional negligence to a sum not to exceed the amount of the fee or the amount of available insurance providing coverage for the claim, whichever is greater.

It is important to note the suggested language includes the word “available.” This avoids the ambiguity that may be created by simply citing “insurance.” For instance, the architect may have $1 million in coverage. Most professional liability policies are written so there is declining coverage as claims or attorneys’ fees and costs are paid. If the architect has two claims and the insurance pays $100,000 on one claim, there will be only $900,000 left to cover the second claim. This is the amount “available” for that claim at that time. If that claim is litigated and $250,000 is spent on attorneys to defend the claim, there will only be $650,000 left on that policy.

Thus, it is important to limit the amount the owner can receive to the available insurance. This consideration may cause the owner to require the design professional to increase its coverage and the designer should then ask for additional fees to cover the increased cost of that insurance.

At least at the contract negotiation stage, most owners would not anticipate going after individuals in case of a claim. They recognize that, for anything major, they want insurance coverage. It is that insurance coverage that would be the source of funds to compensate them for their loss. It is not unreasonable, then, for this limitation to apply as long as there is adequate insurance coverage.

2. Limiting who can be sued
When a claim arises between an owner and design professional it is rare individuals—as opposed to the firm—are named as defendants, but it does happen. One way to minimize this risk is to insert a provision in the contract such as the following:

No shareholder, member, officer, director, employee, or agent of the Architect or the Owner shall be personally liable, directly or indirectly, under or in connection with this Agreement, or any document, instrument or certificate securing or otherwise executed in connection with this Agreement, or any amendments or modifications to any of the foregoing, made at any time or times, hereto or hereafter; and the Architect and the Owner and each of their respective successors and assigns, do hereby waive any such personal liability.

Again, such a provision does not protect the individual who worked on the drawings from being sued by a third party, such as an injured worker. It should, however, prevent the owner or lender from filing a suit against that individual so long as the latter did not sign the agreement in his or her own name. This means that, when the president of the architectural firm signs the agreement, she or he needs to indicate the role as “president” to sign the agreement in that capacity. She or he is not signing the agreement on her or his own behalf, but rather, as an agent of the firm.

This type of provision should be easy to negotiate into an agreement because it protects the owner as much as the designer.

3. Statutes of limitations and repose
Statutes of limitation and repose limit the time in which a design professional can be sued. In many situations, the parties can agree to limit this time by contract. Of course, this would not affect the rights of third parties to sue the design professional. For instance, someone injured as a result of a defect in the design of a building can sue the architect no matter what the contract says—so long as the suit is brought within the applicable statute of limitations or repose.

However, as between the owner and design professional, those parties can agree to shorten the time within which either party can sue the other. Interestingly, the standard documents prepared by the American Institute of Architects (AIA) up until the 2007 versions, contained such a provision. For example, the 1997 version of B151, Abbreviated Standard Form of Agreement Between Owner and Architect, contained this provision:

9.3 Causes of action between the parties to this Agreement pertaining to acts or failures to act shall be deemed to have accrued and the applicable statutes of limitations shall commence to run not later than either the date of Substantial Completion for acts or failures to act occurring prior to Substantial Completion or the date of issuance of the final Certificate for Payment for acts or failures to act occurring after Substantial Completion. In no event shall such statutes of limitations commence to run any later than the date when the Architect’s services are substantially completed.

While this did not shorten the statute of limitations, it affected when that period started—it started upon the date of substantial completion, no matter when the injury occurred or when a defect is discovered. The effect of this was to eliminate the statute of repose.

An example of the effect of this provision is if the roof starts leaking in a building built in Illinois three years after substantial completion. Without the above language, the owner of the building would have four years (i.e. the current Illinois statute of limitations for construction issues) to sue the architect for a design defect that caused the leak. However, if the parties had that 1997 agreement with the above contract language, the owner would have only one year to sue the architect because the statute of limitations had started running three years earlier, leaving only one year remaining on the four year time limit.

The design professional could get even more aggressive with this language by actually shortening the statute of limitations. Here is an example:

The parties agree that no action may be brought by either party more than one year after the earlier of the date of the Architect’s Certificate of Substantial Completion or the date of the Architect’s last substantial work.

Generally, private parties are free to shorten a statute of limitations by contract. (See Order of United Commercial Travelers of America v. Wolfe, 67 S.Ct. 1355 [1947].) Most states would likely uphold the above clause so long as the stated period is not unreasonable. For instance, shortening the period to one ‘week’ would likely fail, but one ‘year’ should work under most circumstances.

Conclusion
Design professionals should consider trying to limit their liability exposure by negotiating a good contract with their client. Of course, the client may push back with provisions that are more favorable to the client. This is where advice from an attorney familiar with the laws of the state where the project is located can be most beneficial.

Werner Sabo, FAIA, FALA, is an architect, attorney, and partner at the Chicago law firm, Sabo & Zahn. He is the author of Legal Guide to AIA Documents, now in its fifth edition, published by Wolters Kluwer. Sabo can be reached at wsabo@sabozahn.com[1].

Shawn Goodman is an attorney at Sabo & Zahn. He can be reached at sgoodman@sabozahn.com[2].

Source URL: https://www.constructionspecifier.com/three-ways-to-limit-your-liability/

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