Orange County Branch Newsletter

September 2013

Law and CE News

Law and CE News - Limiting Errors and Omissions Claims Before They Even Occur


If you have worked in the construction industry long enough, you may feel like becoming embroiled in a lawsuit is inevitable.  Some types of construction have a higher frequency of litigation than others, but the reality is there is no way to completely insulate yourself or your business from becoming involved in litigation.  Regardless of the ability to control whether you are brought into a lawsuit, each engineering firm can and should employ steps during contract negotiations to negotiate beneficial provisions into the project services agreement that can limit exposure and liability should a lawsuit be filed.

Limiting one’s liability or exposure in a lawsuit is best done before a project is even designed.  The agreement you negotiate could be your best tool in a lawsuit.  On the other hand, some agreements contain onerous provisions which may actually expand your liability beyond any damages caused by your own negligence or even your own errors or omissions.  Most times negotiating a contract with a client can be a challenging process that feels something like a game of chicken.  Did I ask for too much?  Not enough?  If I ask for too many concessions during negotiations won’t they give the project to another firm?  The answer to these questions can hinge on numerous factors, including your relationship with the other party, the distribution of bargaining power between the parties, the risks associated with the project, personalities of the key players, and the methods by which you attempt to negotiate your contract.

Even though each situation you encounter as you consider a new project may be different, and the way you negotiate it may be modified from one project to the next, here are a few contract provisions to consider during negotiations with your client which are commonly used to help engineers reduce the risks associated with projects and provide some peace of mind so that if and when litigation finds you, you have some protection in contractually based legal defenses.

Limitations of Liability:

These provisions are exactly what they sound like: a clause in your contract that will limit the amount of damages that you may have to pay if there is a claim against you and you are found liable.  A clause like this that can set a maximum amount of damages that you could be responsible for, regardless of the amount of harm you may have caused, can be the difference between a profitable project and bankruptcy of a business.

The best part is that these clauses are often legal and enforceable. California courts have recognized the enforceability of limitations of liability provisions in construction contracts, and the California legislature has supported their enforceability in creating a statute expressly authorizing these provisions to be negotiated between the parties to a contract.  While they are not enforceable in all states, they are enforceable in the vast majority of states.

One common way to implement a limitation of liability clause is to tie your maximum exposure for damages from any claim to your consulting fee, meaning that if you should be found liable, the maximum amount of damages you would have to pay would be the amount of your fees for the project. A landmarkcourt case was decided in California in 1991 when a developer sued the

engineer who had designed a manmade lake within a residential project. The lake’s liner failed, leading to a $5 million claim against the engineer. The engineer asserted that liability was limited to the amount of the engineer’s fee — $67,640. A trial court agreed with the engineer and the developer appealed.  The appellate court upheld the trial court decision, enforcing the limitation of liability provision.

Damage Waivers:

Damage waiver provisions are often used to limit the types of damages that can be sought against a party that breaches a contract.  A common waiver seen in many construction contracts is a consequential damages waiver to help limit the potentially unforeseeable (or unquantifiable) lost profit claims or other indirect harm that may result from delays in construction or from the need to conduct extensive repairs after a project is completed.  However, parties are free to waive many other damage types as long as they agree to do so in the written contract.

For example, property damage claims in construction related lawsuits often focus on two measures of damages: 1) the loss of value to the structure, or 2) the cost to repair the damage to the property.  In this context, eliminating a diminution in value claim may be desirable due to the subjective nature of such claims, and limiting damages to actual cost of repairs may minimize unforeseen damages that can escalate far beyond what was anticipated by the parties at the time the contract was signed.

Examples of other damage types that can be waived in a contract are delay damages and punitive damages. Mutual waivers of certain damages are very common and make negotiations much easier as both parties are receiving a potential benefit if a problem arises during or after a project is completed.

Certificate of Merit Provisions:

All too often, lawsuits seem to come out of the clear blue without warning, without an opportunity to discuss resolution, without detailed allegations, and sometimes without any merit whatsoever.  In California and in quite a few other jurisdictions, there are statutes which require that before a lawsuit based on professional negligence is filed against an engineer, a claimant’s attorney must file a certificate of merit declaring that he has consulted with a professional in the same discipline as the engineer that he is proceeding against, and that based on this consultation and his/her review of the facts that the attorney has determined that the claim is reasonable and has merit.  In California, unfortunately, there is no obligation for the attorney to detail the name of the design professional with whom the attorney consulted before filing the suit or to disclose with any level of detail what the engineer did wrong or the amount or cause of the damages that arose from that wrongdoing.

However, if care is taken in contract negotiations, a provision requiring a detailed disclosure of the allegations and damages certified by the engineer with whom the attorney has consulted coupled with an opportunity to meet in an effort to resolve the dispute before suit is filed, could help to resolve many claims before any formal litigation, arbitration or mediation are ever commenced.

So the next time you are faced with negotiating your consultant agreement for a project, go into it armed with a plan to limit your risk up front.  You may not always get everything you want during contract negotiations with your client, but if you never try to bargain for provisions that limit your exposure in a lawsuit, you will likely never benefit from their effective use if problems occur during or after a project is completed.

Please contact us at our Oakland, South Pasadena, Orange, or San Diego offices to discuss further.

Christian E. Bredeson, Esq.
750 The City Drive, Suite 400    
Orange, CA 92868
Phone:  (714) 823-4100 Fax:  (714) 823-4111
cbredeson@ccmslaw.com | www.ccmslaw.com

Michele L. Gamble, Esq.
750 The City Drive, Suite 400    
Orange, CA 92868
Phone:  (714) 823-4100 Fax:  (714) 823-4111
mgamble@ccmslaw.com | www.ccmslaw.com

Nothing contained within this article should be considered the rendering of legal advice.  Anyone who reads this article should always consult with an attorney before acting on anything contained in this or any other article on legal matters, as facts and circumstances will vary from case to case.

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