Hard Hat Case Notes

• Author: By Hugh D. Brown and Lauren P. McLaughlin
• Pages: 37-39

THE CONSTRUCTION LAWYER 37Volume 41, Issue 4, 2022

HARD HAT CASE NOTES

Court Holds Limited Liability

Clause Is Not to Be Strictly

Construed

Limitation of liability clauses

are essential risk-management

tools in construction contracts

and require careful drafting to

ensure that they are enforce-

able in the way the contracting

parties intend. In a recent deci-

sion, the Colorado Court of

Appeals analyzed an ambigu-

ous limitation of liability clause

and decided what principles of

interpretation were applicable to

determine the clause’s enforce-

ability as a partial waiver of

liability.

An architect hired an engi-

neer to assist with a project for an apartment building

and to provide mechanical, plumbing, and electrical ser-

vices. The contract between the architect and engineer

contained a limitation of liability clause that stated:

In light of the limited ability of the Engineer to

affect the Project, the risks inherent in the Project,

and of the disparity between the Engineer’s fees

and the potential liability exposure for problems or

alleged problems with the Project, the Client agrees

that if the Engineer should be found liable for loss

or damage due to a failure on the part of [Engineer]

such liability shall be limited to the sum of two

thousand dollars ($2,000 or twice the Engineer’s

fee whichever is greater) as consequential damages

and not as a penalty, and that is liability exclusive.

Before project completion, the owner and the archi-

tect discovered substantial problems with the building’s

heating and hot water systems. The engineer allegedly

admitted that these issues were attributable to its design

error, then proposed and executed repairs to address the

deciencies. The architect found additional problems fol-

lowing the completion of the repairs and chose to employ

a different rm to x the remaining issues.

The owner then initiated an arbitration against the

architect based on claims arising from the design of the

heating and hot water system, and in that arbitration, the

architect was found liable for $1.2 million in damages.

Because the engineer was not a party to the arbitration,

the architect subsequently sued the engineer to recover

damages from the engineer.

In the district court action, the engineer relied on the

limitation of liability clause as a defense to the damages

claimed. The architect argued that the limitation of lia-

bility clause was unenforceable because it was too “vague,

confusing and ambiguous to be enforceable.” The district

court rejected this argument. It found that the limitation

was unambiguous and enforceable because the only plau-

sible interpretation of the language was that it operated

to limit the engineer’s liability to the architect to $2,000

or twice the engineer’s fee.

The engineer then moved for leave to deposit the

sum owed under the limitation of liability clause and

sought dismissal with prejudice. The architect opposed

the motion on several grounds, including that the limita-

tion of liability clause was void as a matter of law under

Colorado law stating that exculpatory agreements are

only enforceable. The district court granted the engineer’s

motion to dismiss the case with prejudice. The architect

appealed.

On appeal, the Colorado Court of Appeals agreed

with the architect that the district court erred in nding

that the limitation of liability clause was unambiguous

because it failed to consider the provision in its entirety.

In part, the court took issue with the lower court’s failure

to analyze the language of the clause that stated “such

liability shall be limited ... as consequential damages.”

The court reasoned that a reasonable interpretation could

support the nding that the limitation only applied to

consequential damages and not other types of damages,

or that all damages caused by the engineer would be clas-

sied as solely consequential damages under the contract.

The court of appeal also cited the potential ambiguity

of the clause’s phrase that “that is liability exclusive.” The

court reasoned that this language could either mean that

the provision was the exclusive means for the architect to

recover consequential damages or that it intended to be

the exclusive means of imposing any liability. The court

was not persuaded by the engineer’s submission that the

phrasing of the provision should not undo the intent of

the parties to limit the engineer’s liability to twice its fees.

The court examined several possible interpretations of

the language in question and found that the existence of

several reasonable interpretations supported the nding

that the clause was ambiguous.

The court then addressed the architect’s claims that the

limitation of liability provision was void because it was

ambiguous. Although under Colorado law an ambigu-

ous contract provision is an issue of fact for the district

court to resolve, the Colorado Supreme Court has held

that ambiguous exculpatory agreements are void and

unenforceable. The court of appeals determined that a

limitation of liability clause is fundamentally distinct

from an exculpatory agreement. The court reasoned that

although both types of provisions limit a party’s liability,

exculpatory agreements are a complete bar to liability and

Hugh Brown

Lauren P. McLaughlin

By Hugh D. Brown and Lauren P. McLaughlin

Published in

The Construction Lawyer

, Volume 41, Number 4. © 2022 American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof may not

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