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Colorado Appellate Court Rules Limitaiton Of Liability Provision In Engineer’s Contract Was Ambiguous, But Not Void

In Johnson Nathan Strohe, P.C. v. MEP Engineering, Inc., 2021 WL 4314216 (Colo. App. Sept. 23, 2021), a Colorado appellate court addressed an issue of first impression and held that a limitation of liability provision in the contract between an architect and engineer was ambiguous, but did not render the provision void.

Johnson Nathan Strohe, P.C., (“Strohe”), the architect, designed an apartment building in Denver.  Strohe hired MEP Engineering, Inc. (“MEP”) to provide mechanical, electrical and plumbing professional engineering services. 

Strohe and MEP signed a contract containing a section entitled “Risk Allocation,” which provided as follows:

“Limitation of Liability: In light of the limited ability of the Engineer to affect the Project, the risks inherent in the Project, and of the disparity between the Engineer’s fees and the potential liability exposure for problems or alleged problems with the Project, the Client agrees that if the Engineer should be found liable for loss or damage due to a failure on the part of MEP-ENGINEERING, INC. such liability shall be limited to the sum of two thousand dollars ($2,000) or twice The Engineer’s fee, whichever is greater, as consequential damages and not as penalty.”

Strohe alleged substantial problems were discovered with the building’s heating and hot water systems designed by MEP when construction as nearly completed.  MEP designed and implemented repairs, but more problems surfaced.  Strohe ultimately retained a different engineering firm for additional repairs. 

The Owner of the building initiated arbitration against Strohe to recover expenses incurred from the defective heating and hot water systems.  MEP was not a party to the arbitration and the Owner was awarded $1.2 million in damages from Strohe.  In turn, Strohe sued MEP for negligence, seeking to recover the amount of the arbitration award. 

In the lawsuit, Strohe moved for summary judgment, arguing that the limitation of liability provision was unenforceable because it was ambiguous.  The trial court held the provision was “straightforward and obvious” with “only one plausible interpretation of the clause –  [the engineer’s] liability to [the architect] for any negligence on the part of [the engineer] is limited to $2,000 or twice [the engineer’s] fee, whichever is greater.”  The trial court went on to find, “the parties entered into an agreement intending to allocate the risk of the project between them and to limit [the engineer’s] liability.”  The trial court also found that the intent of the parties as to why they chose to allocate risks was clearly expressed in the provision – i.e., MEP had limited ability to affect the project, there were inherent risks in the project, and there was a disparity between MEP’s fees and its potential liability exposure.

MEP deposited with the Court an amount equal to twice its fees and moved for dismissal with prejudice, which the trial court granted over Strohe’s objection.  Strohe appealed and the appellate court reversed and remanded the trial court’s decision.

The appellate court held that the phrase “such liability shall be limited . . . as consequential damages” was ambiguous.  The Court found that this could be interpreted to mean the limitation applied only to consequential damages and not to other forms of damages.  The Court went on to state, “[a]nother reasonable interpretation is that all damages caused by the engineer were considered consequential under the contract. . . Perhaps another interpretation is that the parties did not intend ‘consequential damages’ to have its legal meaning or that the use of the term was a simple mistake”.

MEP argued the language was merely “inartful phrasing that does not undo the clear intent of the parties to limit the engineer’s liability to twice its fee.”  The Court disagreed and reversed the trial court’s conclusion that the provision had a clear and unambiguous meaning.  However, despite its conclusion that the provision was ambiguous, the Court rejected Strohe’s argument that the limitation was unenforceable. 

In deciding this issue of first impression, the appellate court held that ambiguous liability provisions are not treated like exculpatory provisions.  While both types of provisions are similar in that they establish limitations on liability, “they are different in kind.”  Exculpatory agreements establish a complete bar to liability, while limitations of liability provisions do not entirely insulate a party from all liability, but instead impose a ceiling.  Given this, the Court held limitations of liability are not “disfavored or tested by the same stringent standards developed for exculpatory, hold harmless or indemnity clauses.” Ultimately, the appellate court limited its holding to “a limitation of liability in a contract between two sophisticated commercial entities” and noted there are “strong policy considerations favoring freedom of contract”, which generally allow business owners to allocate risk as they see fit.

This holding reinforces the idea that parties can allocate risk how they see fit.  However, it also reinforces the necessity for contract provisions to be clear and unambiguous.