Summary: The architectural firm (Architect), Johnson Nathan Strohe, designed an apartment building in Denver. The Architect retained MEP Engineering (Engineer) for the design of the building’s mechanical, electrical, and plumbing systems. The professional services agreement between Architect and Engineer was drafted by the Engineer and contained a limitation of the Engineer’s liability. The actual limitation was straightforward: Engineer’s liability for loss or damage was capped at $2000 or twice the fees Engineer had been paid, whichever was greater. This limitation was then described at the end of the clause “as consequential damages and not as penalty” followed by the apparently incoherent phrase “and that is liability exclusive” (sic).
The apartment building was plagued by problems with its heating and hot water systems. The Engineer designed and implemented repairs that were not adequate. Ultimately the building owner initiated an arbitration with the Architect, resulting in an award of $1.2 million in the owner’s favor. The Architect then sued the Engineer for professional negligence, seeking to recover the losses the Architect had incurred in the arbitration.
The Architect requested a ruling by the district court that the limitation of liability clause was not enforceable because it was “too vague, confusing, and ambiguous to be enforceable.” The district court did not agree, holding that the obvious intent was to limit the Engineer’s liability, focusing on the clearly stated monetary cap, and concluding that there was only one plausible interpretation of the clause: to allocate risk in the Engineer’s favor. The Engineer deposited an amount equal to twice its fee with the court (for disbursement to the Architect), and the court dismissed the lawsuit. The Architect appealed.
Decision: The Court of Appeals of Colorado concluded that the district court had erred by declaring that the limitation of liability clause was clear and unambiguous. The district court’s primary error was failing to analyze or address the “consequential damages” wording in the clause. Courts must review contracts in their entirety, seeking to harmonize and give effect to all provisions.
“Consequential damages” is a legal term used to describe losses that do not flow directly from an injury. The Court of Appeals pointed out that it was possible that in the limitation clause the drafter had intended to limit consequential damages only, in which case other categories of damages (such as direct damages) were not limited. Or, possibly the drafter had not intended the phrase to have its technical legal meaning, and had assumed that the word “consequential” would broaden, not narrow, the scope of the limitation. Similarly, the odd “that is liability exclusive” wording may have been a clerical error or perhaps had some meaning that was not plain. In any event, the Court of Appeals concluded that the limitation of liability clause as a whole was ambiguous and would need to be fully examined and its intent determined back in the district court.
The Court of Appeals also issued a ruling on a broader point. The Architect had argued that not only was the limitation of liability clause ambiguous, but also that the limitation of liability clause was an exculpatory clause—and if an exculpatory clause is ambiguous, it must be declared void. If this argument was correct, rather than sending the ambiguous limitation of liability clause back to the district court for a determination of its intent and meaning, the Court of Appeals would instead declare the clause void and the Engineer’s liability would be determined without any possible benefit from the clause.
The Court of Appeals held that in Colorado limitation of liability clauses are generally enforceable, are not a complete bar to liability, and do not completely negate the shielded party from responsibility for its negligence. Taken together, this showed that the limitation of liability was not inherently exculpatory and could be enforceable even if found to be ambiguous.
Comment: The limitation of liability clause in question did not appear to be based on EJCDC or other standard limitation of liability clauses. See EJCDC® E-570, Agreement between Engineer and Subconsultant for Professional Services (2020), Exhibit I, Limitations of Liability. Certainly the problematic “as consequential damages” and “that is liability exclusive” phrases are not typical in any way.
Despite the setback of the Court of Appeals declining to enforce the limitation of liability clause, the Engineer here may yet prevail when the clause is examined more thoroughly back in the district court. One plausible outcome is that the district court will find that the intent was to broadly limit liability, and the awkward word choices do not prove fatal to the remainder of the clause. Plainly the Court of Appeals ruling against the notion that the limitation was “exculpatory” was essential to giving the Engineer another opportunity to enforce the limitation.