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.
