by Arnie B. Mason, Partner 

For good reason, design professionals typically want to include limitation of liability terms in their contracts to protect against their potentially significant exposure to liability for design errors and omissions.  Yet, no matter how much desired or written, a limitation of liability provision is worthless if it is unenforceable.  While limitation of liability provisions are generally enforceable in construction contracts, the same is not always true for design professionals’ contracts.  That is the lesson learned recently in three related cases in which a Court’s application of a Virginia statute cast serious doubt on the usefulness of limitation of liability contract provisions for certain design professionals in Virginia, including engineers, architects, land surveyors, certified landscape architects and certified interior designers.  As discussed in this article, Virginia is only one of a handful of jurisdictions that prohibits by statute limitation of liability provisions for design professionals.  The existence of this statute coupled with the recent court decisions counsel strongly in favor of design professionals in Virginia including indemnity provisions in their contracts and obtaining adequate insurance to protect themselves.

Overview of the Treatment of Limitation of Liability Provisions in Favor of Design Professionals

Limitation of liability provisions are a fairly recent development in the law of design professionals’ contracts.  Courts have offered varying approaches for examining the enforceability of limitation of liability provisions in favor of design professionals based in large part upon different views on how to balance competing values.  Most prominent in the debate are the values of freedom of contract versus the view that professionals should not be able to contract away responsibility for their own negligent acts.  Factors into this evaluation are the availability of insurance and the opportunity to bargain. 

Given the debate on these competing values, the law on whether and the extent to which limitation of liability provisions will be enforced is not fixed.  Many jurisdictions have upheld limitation of liability provisions in favor of design professionals, while a select few have declined to enforce them.  For example, in varying degrees, courts in California, Florida, Illinois, Indiana, Louisiana, Massachusetts, New Jersey, New York, Pennsylvania, and Texas have upheld limitation of liability provisions in favor of design professionals, including limits based upon a sum certain, available insurance coverage, and/or the fees paid the design professional.  Some courts, however, have declined to enforce limitation of liability provisions in favor of design professionals.  See, e.g., W. Williams Graham, Inc. v. City of Cave City, 709 S.W.2d 94, 95-96, 289 Ark. 105, 107-108 (1986). 

Only a handful of states have chosen to address by statute a design professional’s right to limit its liability.  California expressly permits limitation of liability provisions, but prohibits certain indemnification agreements.  See CAL. CIV. CODE §§ 2782, 2782.5.  Indemnification and limitation of liability provisions are both generally enforceable in Texas by statute.  See TEX. CIV. PRAC. & REM. CODE ANN. § 130.004.  Conversely, Alaska has statutorily declared indemnity provisions in construction contracts to be “void and unenforceable,” ALASKA STAT. § 45.45.900 (2008), which the Supreme Court of Alaska has applied to render void provisions attempting to limit one’s liability for negligent acts, errors or omissions, see City of Dillingham v. CH2M Hill Northwest, Inc., 873 P.2d 1271, 1277-78 (1994).  Similarly, Louisiana, New York and Wisconsin have statutorily prohibited limitation of liability provisions in varying degrees. 

In Virginia, limitation of liability provisions in construction contracts (in contrast to design contracts) are generally enforceable.  See, e.g., Hammond-Mitchell, Inc. v. Constr. Materials. Co. (Va. Cir. Ct. 2008) (Trumbo, J.).  The Arlington Circuit Court, however, recently held in three related cases that Virginia has prohibited by statute certain design professionals from limiting their liability.  See VA. ST. ANN. § 54.1- 411(A) (2008); Ed Peete Company v. Meyer Consulting Engineers Corp., No. 06-1417 (Arlington Cir. Ct.); The Bromptons at Cherrydale, L.L.C. v. Meyer Consulting Engineers Corp., No. 06-1418 (Arlington Cir. Ct.); Joule, L.L.C. v. Meyer Consulting Engineers Corp., No. 06-1410 (Arlington Cir. Ct.) (collectively referred to as the “Meyer Consulting” cases).  The Meyer Consulting cases - and the implications for design professionals working in Virginia - are below.

The Meyer Consulting Cases

While no reported Virginia decision had previously addressed the matter, scholars have recognized Virginia’s statutory prohibition against certain design professionals limiting their liability.  Arlington Circuit Court has now also recognized this principle through three related cases, in which the Court held that the limitation of liability provision set forth in the contract between the Owner and the Engineer was unenforceable as a matter of law based upon the following statutory provision: A.  Nothing contained in this chapter or in the regulations of the Board shall prohibit the practice of architecture, engineering, land surveying or the offering of the title of certified landscape architect or certified interior designer by any corporation, partnership, sole proprietorship, limited liability company, or other entity … .  No such organization shall limit the liability of any licensee or certificate holder for damages arising from his acts or limit such corporation, partnership, sole proprietorship, limited liability company, or other entity from liability for acts of its employees or agents.  No such corporation, partnership, sole proprietorship, limited liability company, or other entity, or any affiliate thereof, shall, on its behalf or on behalf of any such licensee or certificate holder, be prohibited from (i) purchasing or maintaining insurance against any such liability; (ii) entering into any indemnification agreement with respect to any such liability; or (iii) receiving indemnification as a result of any such liability. (emphasis and underscoring added). 

VA. CODE ANN. § 54.1-411(A).

In each of the Meyer Consulting cases, the. Owner-Plaintiff alleged defects in the structural design prepared by the same Engineer-Defendant (an engineering corporation) for three residential towers/condominium structures located in Arlington, Virginia.  Millions of dollars in damages were alleged for the three cases combined.  The Engineer, however, moved the Court to declare its liability to be limited to a total of $1,255,117 for the three Projects combined, in accordance with the limitation of liability provisions set forth in the three contracts.  What ensued was a debate on the meaning and intent of § 54.1-411(A).  In each case, the Court struck the contractual limitation of liability provision based upon § 54.1-411(A) of the Virginia Code.  Without a previous decision addressing § 54.1-411(A),.the parties in the Meyer Consulting cases debated the meaning of the statute.  The Owners argued that the plain language of § 54.1-411(A) was dispositive by its provision that for corporations practicing engineering, “[n]o such organization shall limit the liability of any licensee or certificate holder for damages arising from his acts or limit such corporation ….  from liability for acts of its employees or agents.” Id. (emphasis added).  The Owners also pointed to the General Assembly’s legislative intent underlying § 54.1-411(a) as confirmation that certain design professionals— identified in § 54.1-411(A)—could not limit their liability, but instead had to resort to indemnity provisions and insurance. In this regard, the General Assembly, in enacting Title 54.1 of the Code, recognized that the abridgment of the rights of any person to pursue a lawful profession could be allowed only “as a reasonable exercise of its police powers when it is clearly found that such abridgment is necessary for the preservation of the health, safety and welfare of the public.” Id. § 54.1- 100. Thus, according to the statute, the restrictions in Title 54.1 were imposed “for the exclusive purpose of protecting the public interest …,” in part because “[t]he unregulated practice of the profession or occupation can harm or endanger the health, safety or welfare of the public,” and the “public is not effectively protected by other means.” Id. Conversely, the statute balances the competing interests between the public and the design professionals by allowing the latter to obtain insurance and/or indemnity agreements to manage the financial risks associated with the liability exposure of design professionals. Id. § 54.1-411(A)..  The Engineer responded in the Meyer Consulting cases by contending that § 54.1- 411(A) simply allowed the practice of engineering and architecture by specific business entities and served to confirm that “use of such an entity will not automatically eliminate all potential liability.” The lynchpin to the Engineer‘s argument has its genesis in an unpublished North Carolina federal district court decision, which concluded that “[n]othing in the [Virginia] statute is relevant to the question of whether an engineer or an engineering firm may contractually limit its liability to a client.” Roanoke Props. Ltd. P’ship. v. Dewberry & Davis, No. 93-59-CIV-2-B0,  1996 U.S. Dist. LEXIS 10521, at *4 (E.D.N.C. June 3, 1996) (unpublished)..  The unpublished decision in Roanoke Properties, however, was not binding on, nor followed by, the Arlington Circuit Court..  Instead, the Court in the Meyer Consulting cases found “the limitation of liability provision set forth in the contract [to be] unenforceable as a matter of law based upon VA. CODE ANN. §54.l-41l(A).” In making this ruling, the Court stated that “the statute should be interpreted as the plaintiffs do to prohibit the liability or eliminating the liability in this matter.” Tr. at 32:8-11 (Aug. 30, 2007).  The Court further reasoned that “the fact that the statute at the end provides for other ways of protecting engineers and other professionals subject to this code statute through maintaining insurance or entering into indemnity agreements or receiving indemnification as a result of other liabilities supports that.” Id. at 32:12-17. 

Conclusion

In light of the Meyer Consulting cases and VA. CODE ANN. § 54.l-41l(A), it is now clear that in Virginia, engineers, architects, land surveyors, certified landscape architects and now certified interior designers, cannot rely on limitation of liability clauses.  To be sure, design professionals may still seek to protect themselves by obtaining adequate insurance coverage and contracting for indemnity provisions that shift the liability risk onto another party.  With these protections, these design professionals in Virginia may avoid the potentially catastrophic financial consequences that could result if and when a limitation of liability provision is declared unenforceable, leaving the design professional responsible for defects in its design and the resulting damages incurred. 

The information or opinion provided in this article is the author's own and not necessarily that of Watt, Tieder, Hoffar & Fitzgerald, LLP. The author is solely responsible for the information and opinion that he or she has provided. The information contained herein does not replace seeking specific legal counsel to directly address individual client needs.
 
Watt, Tieder, Hoffar & Fitzgerald is one of the largest construction law firms in the world, with a practice that encompasses all aspects of construction contracting, claims and disputes resolution, and transactional legal services. WTHF principally represents large general contractors, design firms, and sureties throughout the country and internationally.