Expert Commentary

Design Professional's Attention to Contract Clauses Can Pay Dividends

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.


Design Liability
September 2008

A recent North Carolina opinion supported the engineering firm on a number of the clauses in the unpublished opinion in Mosteller Mansion, LLC, et al.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 case law 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 case law 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.


Opinions expressed in Expert Commentary articles are those of the author and are not necessarily held by the author's employer or IRMI. Expert Commentary articles and other IRMI Online content do not purport to provide legal, accounting, or other professional advice or opinion. If such advice is needed, consult with your attorney, accountant, or other qualified adviser.

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