GUY LORANGER
Staff Writer
An engineering firm could cap a client's damages award at $50,000 through a limited-liability clause in their contract, the Court of Appeals has ruled in a first-impression decision.
The client, a grading company, sued the engineering firm in 2006 for negligence and breach of contract after the firm's surveyors botched five construc-tion-site benchmarks, forcing the grading company to import a massive amount of fill dirt.
After a Harnett County jury awarded the grading company $574,714, the engineering firm moved to have the award tossed because of a "Risk Allocation" clause in the parties' contract.
The clause limited damages to the greater of either the fee the firm charged for its services (in this case, roughly $38,000) or $50,000.
The trial court denied the motion, but the Court of Appeals reversed in a unanimous April 1 decision.
The clause was part of a contract negotiated between two "sophisticated, professional parties who conducted business at arm's length," and it violated neither state law nor public policy, the appeals panel held.
"People should be entitled to contract on their own terms without the indulgence of paternalism by courts in the alleviation of one side or another from the effects of a bad bargain," wrote Chief Judge John C. Martin, quoting Gas House, Inc. v. Southern Bell Telephone & Telegraph Co., 289 N.C. 175 (1976).
Judges Linda Stephens and Sanford L. Steelman Jr. concurred in the decision, Blaylock Grading Co. v. Smith (North Carolina Lawyers Weekly No. 08-07-0378, 8 pages).
It marks the first time a state appellate court has validated such a provision in this setting. These clauses are being increasingly placed in contracts with architects, engineers and surveyors, according to the engineering firm's attorney, Adrianne Huffman of Charlotte.
"We see these all of the time," said Huffman, who handled the appeal along with David B. Hamilton. "The plaintiff's own expert witness on standard of care testified that he had the same provision in his own standard contracts."
Common or not, the plaintiff's attorneys maintained that such provisions harm the public. They said they will petition the Supreme Court to review the case.
"If you have two businessmen contracting at arm's length, they perhaps can limit their liability as it relates to breach-of-contract issues, but they should not be allowed to limit their liability as to negligence," said Edgar R. Bain of Lillington, who handled the case with L. Stacy Weaver III and Robert A. Buzzard.
"In this case, where the surveyor made almost a 20-inch error in establishing the grade that goes to his skills," Bain said. "It's not that he didn't do the job. It's that he did the job negligently."
PUBLIC SERVICE EXCEPTION?
The trial court held in November 2006 and the grading company argued on appeal that the clause could not be enforced because the public service exception applied.
Under that rule, a limited-liability clause is void if it is issued by a common carrier or public utility in relation to its provision of a public service.
"The statute [G.S. Sect. 89C-23] that establishes the regulation of engineering and surveying says that it is 'for the welfare and protection of the public,'" Bain said. "This is an engineer a professional who is licensed by the state, and his skills are supposedly guaranteed because of the testing required to become licensed.
"My client was entitled to that protection under the law."
The Court of Appeals disagreed, saying that regulation of a profession did not necessarily convert it to a public service.
In this case, the breach of contract only resulted in economic loss to one of the parties and did not implicate the health and safety of the public, the panel said.
The opinion also pointed out that a third party could still bring a negligence suit against either a surveyor or engineer if there was harm involved.
From a practical, business standpoint, that decision makes sense, said Asheville attorney W. James Johnson, who filed an amicus brief on behalf of several state and national engineering, surveying and architectural organizations.
"This decision will not impact design professionals in terms of claims by a third party in any way, but it does allow a designer on the front end to negotiate liability with its client, and the client will have the opportunity to either agree or disagree to it," Johnson said.
"It's going to be interesting to see how this decision affects contract negotiations."
For instance, an engineer could argue to a client that if he is providing $7,500 worth of services, there should be limited liability; the engineer should not be on the hook for a loss that could exceed $500,000, Johnson said.
On the other hand, Johnson said he could see a how a client would insist on removing liability limits in situations in which the engineer assumes almost complete control over a project.
"With this decision, I don't think that overnight these [provisions] will be in every contract," Johnson said. "But if they are, clients can vote with their feet if they don't like it."
NO INDEMNITY CLAUSE
In the decision, the Court of Appeals also rejected the grading company's argument that the limited-liability clause violated G.S. Sect. 22B-1.
The statute limits a promisee in an indemnity agreement from recouping damages paid to a third party as the result of personal injury or property damages caused by the promisee.
Since the contract in this case involved a clause that limited a party's liability to the other, not an indemnity clause, the statute did not apply, the panel held.
Questions or comments may be directed to guy.loranger@nc.lawyersweekly.com.
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April 14, 2008
