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Limit Liability With a Properly Prepared Contract

Closeup of a lawyer or a real estate agent proofreading Terms and conditions document.

In today’s litigious world, limiting liability is of paramount importance. It does not matter whether the contractor is handling a large multi-unit project or smaller job, taking steps to limit liability can mean the difference between obtaining a significant profit or being the defendant in a civil lawsuit.

The most common construction lawsuits arise out of work product issues; injuries, property damage and other negligence; delays and other breaches of contract; and pricing disputes. How can contractors protect themselves and their company against liability?

Limitation of Liability Clauses

The most important line of defense against liability is a properly prepared contract. Among other terms and conditions, contractors need a contract that contains a strong, yet enforceable, limitation of liability clause. Most standard AIA or form contracts have a limitation of liability provision in it. However, it is always a good idea for contractors to review their contract and make sure that the liability limitation clause is properly worded and is tailored to their specific area of work or project. It is also a good idea, especially if a contractor drafted the contract on its own, to have an attorney review it and comment on the level of protection and whether it will be enforceable in court.

In general, a limited liability clause is a provision in a contract that limits the amount of exposure that a contractor could face if a lawsuit or another claim is filed against him/her. It provides a way to cap damages that the plaintiff could be entitled to receive from the contractor. In general, a limitation of liability clause can limit liability in a variety of ways. For example, a contractor could limit liability to the monies paid out under the contract, an agreed upon sum of money, insurance coverage or a combination.

Enforceability of Limitation of Liability Clauses and Client Clarity

Most U.S. courts have ruled that liability limitation clauses are enforceable unless they are found:

  • to be ambiguous or unconscionable;
  • the intention to limit the liability was not clearly expressed in the contract;
  • one party had unequal bargaining powers, or a higher level of sophistication; and
  • if there was public policy or statute prohibiting the enforcement of the limitation.

Thus, it is important for limitation of liability clauses to be written clearly and concisely, and be understood by the parties to the contract.

When dealing with owners who are not familiar with construction contracts, contractors should make certain that the client understands the provisions of the contract. It is important not to use unnecessary and confusing “legalese.” It is much better to provide clients with clear and easy-to-understand agreements. Contractors should go over the limitation of liability provision of the contract with their clients. It can be a good idea for contractors to have them initial the paragraph, or indicate somewhere in the contract that the limitation of liability was discussed with them.

Unequal Bargaining Power and Contracts of Adhesion

When a court determines that one party has had no ability to negotiate the provision, the court deems that provision to be adhesive. The term “contract of adhesion” is commonly used, but what does it mean? A contract of adhesion is created when one party has unequal bargaining over the other and doesn’t provide enough room to negotiate the clause. This is why some contractors will include additional provisions in the liability limitation language, which they intend to negotiate out from the beginning.

In other words, they throw the kitchen sink into the provision and then allow their client or his/her attorney to negotiate out certain terms so that they can rule out a possible contract of adhesion argument. This approach should be used with caution. Contractors run the risk of scaring a client or losing a job if their contract contains excessively restrictive language, regardless of the fact that they planned on allowing the client to negotiate the more restrictive language out of the agreement.

A good tip to show that the terms of a contract were discussed and negotiated is to make sure to hold onto any drafts going back and forth between the contractor and the client. Drafts can be used to establish a paper trail showing that the contract was negotiated, and illustrating the sophistication and equal bargaining power of the client.

One final point on the limitation of liability provision is that they only apply to the parties in the contract. A third-party subcontractor is not going to be bound to the terms and conditions of the contact with the client. Contractors need to make sure they have proper subcontracts with their subcontractors.

Other Ways to Limit Liability

Clarify the Contractor’s Duties and Scope of Work

Contractors need to make sure that all parties to the contract understand the scope of work and responsibility. Both the contractor and the client need to walk away from client meetings having a clear understanding of what is expected by each party of the other. For example, if an architect is involved in the project, the contractor should clarify both with the client and the architect what it is that they are responsible for. It is also advisable to reach out to the client and the architect on a regular basis to make sure that the project is proceeding as planned.

Proper Personnel, Adequate Supervision and Licenses

Other important factors to limit liability are having proper personnel, adequate supervision and proper licenses. The term “proper personnel” refers to the contractor and his/her workers being qualified for the specific job. A contractor should never assign a job or task to a friend or family member out of obligation to them. The individual must be qualified to do the job.

It is equally important to provide adequate supervision. Adequate site supervision can help limit negligence, personal injury and property damage claims. It is important that supervision is a regular part of any contraction project, large or small.

Finally, it is important for contractors to make sure that they are in full compliance with local and state licensing compliance requirements. While significant fines can be assessed against unlicensed contractors, not maintaining proper licenses can be used in civil litigation as evidence of negligence.

While there is no way to prevent liability, contractors that employ these tips and tactics can significantly limit their potential risk and exposure.

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