Enforcement of limitation of liability clause in geotechnical engineering contract. Taylor Morrison of Colorado, Inc., v. Terracon Consultants, Inc. Court of Appeals of Colorado (2017), by Hugh Anderson

Summary: A residential developer, Taylor Morrison, retained Terracon Consultants to provide geotechnical engineering and testing services with respect to a new subdivision. In particular, Terracon was responsible for testing the soil for compliance with construction specifications and building codes. After construction of the houses in the subdivision, many homeowners complained to the developer that the drywall was cracking, leading to an investigation that implicated the condition of the soils on which the houses had been built. The developer brought a lawsuit against Terracon and various construction contractors.

At a subsequent trial, experts retained by the developer harshly criticized the quality of Terracon’s services. According to these experts, Terracon’s supervision of technicians, soil testing, and review of test results failed to meet the contract’s professional standard of care. The experts’ testimony included the opinions that Terracon’s performance “doesn’t even come close to what should’ve been done in order to provide assurances,” “was a complete disregard of their responsibilities,” and was “as bad as I’ve seen anywhere, by far, in 40 years of practice.”
Terracon’s contract with the developer included a limitation of liability clause stating that Terracon’s total aggregate liability to its client and to any third-party granted reliance on Terracon’s services by the client, was limited to $550,000. The trial court ruled that the limitation of liability was enforceable, and the developer appealed.

Decision: On appeal the developer argued that the trial court should have allowed the developer’s experts to offer their opinion that Terracon’s conduct was “willful and wanton” and that therefore an exception to the limitation of liability existed. The decision does not elaborate on the “willful and wanton” exception, but appears to acknowledge that excessively irresponsible conduct—reckless, intentional—can be a basis for not enforcing a limitation of liability clause in Colorado. The trial court had issued a pre-testimony ruling that the developer’s experts could not offer an opinion as to whether Terracon’s services were “willful and wanton,” because that category “is not an engineering concept” but rather is a legal concept. After listening to the testimony (as restricted), the jury concluded that Terracon’s conduct was not “willful and wanton,” resulting in enforcement of the limitation of liability.

The appellate court agreed that it was correct to limit the experts to describing Terracon’s conduct, and offering opinions about the standard of care; and also correct to preclude the experts from stating an ultimate conclusion about whether the conduct should be characterized as willful and wanton. In the opinion of the appellate court that final decision was rightly left to the jury.

Comment: In many jurisdictions the law regarding limitation of liability clauses is not well developed. Presumably in most states that generally enforce such clauses there would nonetheless be at least a narrow exception for extreme situations in which the party seeking the clause’s protection had willfully or intentionally failed to carry out its obligations—in other words, the clause presumably would not be viewed by the courts as a license for deliberate noncompliance with professional duties.

The limitation of liability clause contained a brief preamble that stated that the geotechnical engineering firm and its client “have evaluated the risk and rewards associated with this project, including consultant’s fee relative to the risks assumed, and agree to allocate certain of the risks” such that the engineering firm’s total exposure to liability was $550,000. This introductory wording was not critical to the decision, but does offer a succinct justification for including a limitation of a design professional’s liability. EJCDC could consider whether similar explanatory wording would be useful in the limitation of liability clauses that are optional in various EJCDC professional services agreements (and included as a standard provision in EJCDC 520, the Short Form of Agreement between Owner and Engineer for Professional Services).