Limitation of Liability – Delaware Case Study

Limitation of Liability – Delaware Case Study

Limitation of liability provisions are a common tool for managing risk in contracts for services.  The basis for the concept is simple economics.  In many industries outsourcing work creates a risk management dilemma for both the client and the service provider.  Often the economic risks associated with a service provider’s error, or a bad result, far exceed the fee paid by the client for the work.  To manage the liability associated with this exposure many service providers seek to limit their liability to the amounts paid to them for their service (or even a fraction of that amount more closely associated with their potential profit margin).

For many years the enforceability of limitation of liability provisions was in question in most jurisdictions with no or few cases on the topic.  Today many state courts have issued decisions on enforceability and related issues.  The case of RHA Construction, Inc. v. Scott Engineering, Inc., (Del. Super., 2013) is the latest decision offering guidance for use in drafting and negotiating contracts.

RHA Construction engaged Scott Engineering pursuant to two contracts for engineering services dating back to May 2007 and August 2008.  Both contracts were approximately ten pages in length and incorporated a one-page addendum titled “Terms and Conditions of Agreement for Professional Services” (“Terms and Conditions”).  The Defendant (Scott Engineering) contends that any award of damages should be limited to the fees paid to them as specified by the limitation of liability provision contained in the contract.  The Plaintiff (RHA) disputes not only the enforceability of the limitation of liability provision but whether the Terms and Conditions were even attached to the base contract documents.

RHA swore under oath that the Terms and Conditions addendum was not attached to the 2007 contract document.  However, under Delaware law RHA is still held to the terms which were clearly incorporated by reference in the 2007 contract.  The Court indicated that based on prior case law, “the General Terms and Conditions document was not only incorporated by reference in the contract, but the contract language itself described the General Terms and Conditions as ‘an integral part of the agreement’ … therefore, as a matter of law, the Terms and conditions, … were incorporated into the May 2007 agreement.”

Limitation of liability provisions that relieve a party from its own negligence are generally disfavored in Delaware.  However, a limitation of liability may be enforceable where the damages are uncertain and the limitation amount agreed upon is reasonable.  In upholding such provisions the Court will look to factors including: the length of the contract, the clarity of the language, the clarity of the disclaimed liability, and whether the clause was in boldface type.  The Scott Engineering provision read as follows:

“Owner and Engineer have discussed the risk, rewards and benefits of the project and the Engineer’s total fee for services. The risks have been allocated such that the Owner agrees that to the fullest extent permitted by law, Engineer’s total liability to Owner for any and all injuries, claims, losses, expenses, damages or claims expenses arising out of this agreement from any cause or causes, shall not exceed the total fee. Such causes include but are not limited to design professional’s negligence, errors, omissions, strict liability, breach of contract or breach of warranty.”

The Court held that the Terms and Conditions were clearly referenced in the base contract, and that the limitation of liability provision itself was clear as it specifically referenced the type of negligent action being disclaimed by Scott Engineering. In addition, the Court held: “the fact that these contracts were not made in a vacuum, it is untenable to assert the parties would have been able to easily ascertain the damages as a result of any alleged breach at the time of contracting. Moreover, limiting Plaintiff’s recovery to fees paid would not be unconscionable”.

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