Orange County Branch Newsletter

September 2014

Law and CE News

No Laughing Matter—When LOL Clauses Fail

A great tool to control risk is the LOL—limitation of liability clause, not the common abbreviation for “laugh out loud.” The LOL clause can cap the level of exposure to a contract claim to a set dollar amount. But while some contracts contain LOL clauses, those same contracts often include indemnity clauses—sometimes with onerous obligations. Many contracts fail to address the relationship between LOL and indemnity. This creates a problem when an LOL clause places a cap on recovery, but an indemnity clause does not mention the liability cap. Without specific language addressing the relationship between these two clauses, designers could be on the hook for indemnity payments that have no cap despite an LOL clause.

While there are no California cases directly on point addressing this issue, two non-California cases illustrate how this issue could play out. In a recent case out of Maine, Kohl’s Department Stores v. W/S Alfred Road Properties LLC and S.W. Cole Engineering, the engineer S.W.C. contracted to perform geotechnical engineering services for W/S Alfred Road, the developer for a Kohl’s department store. The agreement contained a $50,000 LOL clause and an indemnity clause. The LOL did not address any restraints on indemnity, nor did the indemnity clause link the potential for recovery to the limitation of liability clause. After cracks appeared in the structure, Kohl’s sued S.W.C. and Alfred, which in turn sued S.W.C. for indemnity. S.W.C. argued the LOL clause limited Alfred’s indemnity rights to a maximum recovery of $50,000. The court rejected the engineer’s argument due to the failure of the LOL clause to reference indemnity, and vice versa. The court ruled S.W.C. “has a duty to indemnify” and to read the LOL provision to modify that duty without express language would render the entire indemnity provision “moot.” Instead of a clear LOL of $50,000, S.W.C. faced exposure of more than $1 million to Alfred.

Similarly, a 1986 Arkansas case involving a dispute between a city and an engineer, W. William Graham, Inc. v. the City of Cave, held that a contract clause limiting liability for “professional negligent acts, errors, or omissions” to $99,000 did not limit liability for indemnity. The LOL clause did not mention contractual claims, and the court adamantly stated that it “cannot engraft onto the contract a limitation not set forth” and that it “cannot rewrite a contract for the parties” if the language does not appear in the contract. The engineer in Graham had to face the City’s $400,000 claim without the LOL protection.

These two cases are not California law, and California courts are not bound to follow these holdings, but they can look to them for guidance. Therefore, a prudent negotiator will include language in agreements that cross-reference and apply LOL to any indemnity clause. Language subjecting the indemnity provisions to an LOL clause can help provide clarity in the event of a dispute and can bolster protection from risk on a project. Remember to seek clarity and consistency in contract language and avoid ambiguity. If the contract covers the bases at the outset of a project, it can help to avoid added costs, risk, and unnecessary litigation.

Contact us at our Oakland, South Pasadena, Orange, or San Diego offices to discuss further:

Ryan J. Kohler, Esq.
[email protected]

Valerie N. Gallo, Esq.
[email protected]

Collins Collins Muir + Stewart LLP
1100 El Centro Street | South Pasadena, CA 91030
Phone:  (626) 243-1100 | Fax:  (626) 243-1111 |

Nothing contained in this article should be considered legal advice. Anyone who reads this article should 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.