Limitation of Liability - Where Do We Go From Here?

During the recent Virginia Legislative session, ACEC Virginia, together with other design professional organizations in the Commonwealth, were successful in having legislation passed that clearly permits Limitation of Liability (LOL) clauses in agreements for design professional services in Virginia. Now that we have accomplished this, we need to be aware that the legislation alone does not guarantee the enforceability of LOL clauses in our agreements.

About twenty years ago, structural engineers across the country were facing considerable challenges with the rising costs of professional liability insurance. About twenty years before that, ASFE (Association of Soil & Foundation Engineers) faced the same challenges. ASFE developed limitation of liability language to place in their agreements to more reasonably allocate the risk between themselves and their clients. In the early 1990's structural engineering groups such as CASE (Council of American Structural Engineers) borrowed the idea from ASFE and worked with liability insurance carriers to come up with simple documents to use as agreements between the designer and clients. These agreements included limitation of liability clauses. Some liability insurance carriers actually offered discounts to consultants who were successful in having written agreements that included LOL clauses. Other professionals, besides just structural engineers, began to use the agreement form, particularly for smaller projects. As use of the documents became more wide spread, the term Limitation of Liability was changed to Allocation of Risk for some consultants, to better describe the intent, and to counter the negative first impression offered by the term Limitation of Liability. The standard agreement evolved into a simple one page, front and back, agreement with all of the specific project information (client, scope, fee) on the "front side" and the Terms and Conditions of the Agreement on the "back side". The Risk Allocation, or Limitation of Liability clause, was included in the back side language. LOL clauses are usually worded to limit the liability of the design professional to either the amount of the fee, or some identified amount, whichever is higher. Some agreements simply use the amount of the fee.

Since early times limitation of liability clauses have been challenged in courts of law to see if they are really enforceable. There are a number of web sites addressing the subject, including actual cases and court decisions. The general consensus seems to be that there are several conditions that have to be met in order for an LOL clause to be enforceable.

• 1. The first condition is that there can be no policies or statutes that prohibit the use of LOL in agreements. Hopefully we have taken care of that in Virginia.
• 2. The second condition is that the language in the agreement has to be clearly identified so that it is not buried in the fine print. The client has to know the language is there and what it means. Some guidelines suggest the paragraph be bold or be in italics.
• 3. The language should be worded so that it is negotiable - "higher limits may be available for a proportionately higher fee".
• 4. The agreed upon amount for the limit should be reasonable. Some fees might be $1,000 or less, while the dollar value of the exposure could be considerably higher. If the limit is based simply on the fee amount, a court might consider that unreasonable.

As a structural engineer, we occasionally get to see other consultants' agreement forms, particularly geotechnical engineers. The language on the back side is similar, but is usually edited for the specific project. Some use Risk Allocation while others use the direct Limitation of Liability term. Some give the option of the design fee, or a listed amount, whichever is greater, while others just use the amount of the fee. None that I have seen use either bold, or italics, to highlight the language, and in none of the agreements was the language pointed out to the client.

When the LOL legislative effort began several years ago, some ACEC Virginia members had little interest because their clients did not use LOL in agreements. Limitation of Liability has been a growing subject, particularly in larger design-build projects, where there are a number of entities involved, including designers, contractors, and owner/developers. Without limitation of liability in contracts, one participant could be responsible for only a small part of the project, while they could be included as liable for the entire project. Both the Federal Highway Administration (FHWA) and NAVFAC have allowed LOL clauses in their contracts. The Commonwealth of Virginia Bureau of Capital Outlay Management (BCOM) does not prohibit limitation of liability, including it in projects where it was requested and where it was determined to be appropriate and reasonable for the project. It was pointed out that BCOM only acts as a representative for a number of State agencies and the individual agency would make the final decision on LOL.

Now that we have been successful in obtaining favorable LOL language in the Code of Virginia, we must also be careful in the language used in our own documents, and in the interaction with our clients. If your attorney, or your insurance carrier, has not reviewed your agreement forms, you might offer them the opportunity.

These comments are offered only as personal observations. You should consult your own legal professional or professional liability carrier, for legal opinions on your specific agreements.

It would be good to hear from some Virginia consultants who have successfully used Limitation of Liability in your contracts, and successfully met challenges to that language.

Bill Johnson, P.E., SECB

Senior Project Manager

TAM Consultants, Inc.

Williamsburg, VA.