Design Professional's Attention to Contract Clauses Can Pay Dividends
September 2008
An engineering firm from Georgia performing
professional services in North Carolina has found that attention to contract
clauses related to responsibility for risk can provide protection against later
claims.
by Kenneth
A. Slavens
Husch Blackwell
Sanders LLP
A recent North Carolina opinion supported the engineering firm on a number
of the clauses in the unpublished opinion in Mosteller
Mansion, LLC, et al. v. Mactec Eng'r and Consulting of Ga., Inc., Court
of Appeals of North Carolina, May 20, 2008.
Background
Mosteller Mansion, LLC, contracted with the engineering firm of Mactec Engineering
and Consulting of Georgia for Mactec to assess subsurface conditions, render
opinions on the suitability for construction, and offer recommendations for
foundation design in relation to the site Mosteller was planning to purchase
for the construction of an apartment complex.
Following the report and recommendations of Mactec, Mosteller purchased the
subject property and began construction. Mosteller allegedly found:
soil altogether unsuitable for the proposed construction, unsuitable to
provide support for the proposed foundations, unsuitable for the other improvements
… and inconsistent with the findings and recommendations of [Mactec's] report.
A lawsuit followed immediately.
Mactec's contract with Mosteller for the professional services included a
clause providing for the choice of law applicable to the contract, which specified
Georgia law as the controlling law, a clause limiting liability to a maximum
dollar amount, and a clause restricting the recovery of indirect (consequential)
damages.
The trial court ruled in favor of Mactec on all issues relative to the protections
provided in its contract with Mosteller. Mosteller appealed to the North Carolina
Court of Appeals.
After a review and analysis of the provision of the agreement, the law of
North Carolina, the law of Georgia, and the rulings of the trial court, the
North Carolina Court of Appeals concluded that all of the clauses were enforceable
as written.
Choice of Law Clause (Contract)
Mosteller argued that North Carolina law should apply, despite the provision
in the contract wherein the parties agreed that Georgia law would apply. Mosteller
argued that the work was performed in North Carolina, and the tort was committed
there resulting in the damages being claimed.
The North Carolina Court of Appeals agreed that, as for any tort claims,
North Carolina law would apply. However, North Carolina generally recognizes
the validity and enforceability of a contractual choice of law provision unless
(1) the state selected by the parties to have its law apply per the contract
clause has no substantial relationship to the parties or the transaction or
(2) the law of the selected state is contrary to the fundamental policies of
North Carolina.
The court found that because Mactec maintains its principal place of business
in Georgia, the state the parties selected by contract, a substantial relationship
existed. Second, the court concluded that this case was not a matter involving
"good morals or fundamental principles of natural justice" which would require
it to reject the law of the selected state.
As a result, the North Carolina Court of Appeals agreed with Mactec that
the contract claims being asserted were controlled by Georgia law.
Limitation of Liability Clause (Contract)
Mosteller argued that the limitation of liability clause as applied to the
contract claims violated Georgia public policy and should be found unenforceable
and void. After considering the caselaw and Georgia statutes, the court found
the clause enforceable because it did not violate public policy nor applicable
statutes.
Indirect Damages Clause (Contract)
The clause at issue was relatively straightforward. It read:
Indirect Damages. Neither party shall be responsible to the other or to
any third party for economic, consequential or indirect damages (including,
but not limited to, loss of use, income, profits, financing, reputation)
arising out of or relating to this Agreement or the performance of the services.
The North Carolina Court of Appeals reviewed the clause in the context of
the Agreement at issue. It found that the provision did not "exculpate or release"
Mactec from liability for personal injury, death, or property damages, which
would violate a Georgia statute.
Mosteller argued that because Mactec was a licensed professional, it could
not relieve itself by contract of the duty to exercise reasonable care. After
consideration, the court acknowledged that engineers are licensed by the state
and, as professionals, they are viewed in a different light. However, the court
held that the indirect damages provision only relieved Mactec from liability
for indirect economic damages and did not reach personal injury and property
damage claims. Given the scope of the clause, the court concluded that there
was no violation of public policy and the clause should be enforced as written.
Limitation of Liability and Indirect Damages Clauses (Tort)
The court of appeals turned its consideration to the tort claims, which as
noted above, this court found would be controlled by the law of North Carolina
as opposed to the law of Georgia under the choice of laws provision. Mosteller
made the same arguments for the unenforceability of the clauses on the limitation
of liability and waiver of indirect damage as applied to the tort claims that
it made in regard to the contract claims. That is, Mosteller argued the clauses
violated various statutes and, more importantly, the public policy of the state
of North Carolina.
The court looked to prior caselaw for similar issues. In support of its ultimate
conclusion that the clauses were enforceable, the court quoted the following
language:
People should be entitled to contract on their own terms without the indulgence
of paternalism by the court on the alleviation of one side or another from
the effects of a bad bargain. Also, they should be permitted to enter into
contracts that actually may be unreasonable or which may lead to hardship
on one side. It is only where it turns out that one side or the other is
to be penalized by the enforcement of the terms of a contract so unconscionable
that no decent, fair minded person would view the ensuing result without
being possessed of a profound sense of injustice, that equity would deny
the use of its good offices in the enforcement of such unconscionability.
The court looked at the factors that it considers in deciding if a "profound
sense of injustice" comes into play. It held there were no irregularities in
the formation of the contract. There was no inequality in the bargaining positions
of the parties. No specific state policy required a distinct limitation on the
bargaining of either party. Both parties were "sophisticated professionals."
The only claims presented by Mosteller were related to economic losses as opposed
to a health or safety concern.
The North Carolina Court of Appeals concluded that the limitation of liability
clause and the limitation on indirect damages were equally applicable to Mosteller's
claims, which sounded in tort—negligent misrepresentation and professional negligence.
Lessons We Can Learn
The engineering firm in this case received exactly what it bargained for
in its contract with the developer. Is there anything we can take away from
this engineering firm's experience and apply to our experiences to increases
the chances that your firm will receive similar treatment? The answer to that
question is clearly "Yes."
When considering choice-of-law provision, be sure that there is some connection
to the project or the parties that will allow the reviewing courts to find a
"substantial connection," as was found in this case. The connection does not
necessarily need to be the same connection, but there should be a connection.
Second, review your available options. You may traditionally select the law
of your principal place of business, but consider if there is more favorable
law in the state where the project is located, or where the other party has
it principle place of business. For example, you may want to consider the state's
policy on indemnity clauses, the economic loss doctrine, or, like this matter,
the enforceability of a limitation of liability clause.
On the limitation of liability clause, the contract here limited recovery
to a specific dollar amount or the engineer's fee, whichever was greater. This
was helpful in finding the clause enforceable. The engineer had some exposure,
but limited exposure. If the exposure was unlimited, there would have been a
much different result.
On the indirect damage clause, the court paid special attention to the distinction
between someone's bad business deal (economic loss) and the health and safety
of people. Keep this distinction in mind. Courts are likely to be more protective
of health and safety than economic losses. The engineer's limitation to economic
losses made the clause much more likely to be enforceable and resulted in the
ruling the engineer was hoping for.
Overall, remember that the parties to this contract were "sophisticated businesses."
Clauses of the sort negotiated here would most likely be unenforceable in an
agreement with a "consumer" as opposed to a business entity.
The bottom line for many of these clauses, as illustrated by this case, is
the common axiom: Do not overreach. The more reasonable the clause when viewed
in the business context, the higher probability you will end up with exactly
what you contracted to get in the risk management process.
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