A limitation of liability clause limits the amount you will pay in the event the project goes poorly. Here is an example of a limitation of liability clause:
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, error, omission, strict liability, breach of contract or breach of warranty.
An owner in Indiana recently found out that this clause was enforceable and limited recovery of his $4 million claim to $70,000. In SAMS Hotel Group, LLC v. Environs, Inc., the owner hired the architect to design a hotel. The project went so poorly that the hotel had to be torn down after substantial completion. The owner sued the architect asserting negligence and breach of contract. The court found the negligence claim barred by the economic loss doctrine.
The court then found that the architect did breach the contract with the owner and was liable for damages. But, the damages the architect owed to the owner were limited to $70,000. The court found that the parties negotiated the terms of the contract and the owner was well aware of the risks involved in designing and building hotels. In essence, the owner agreed to assume the risk of loss created by the architect’s poor workmanship.
Limitation of liability clauses can be an effective tool to limit claims on a construction project. Just make sure you understand the ramifications of such a clause in your contract.