Montana Supreme Court Holds That a Waiver of Consequential Damages and a Partial Limitation of Liability in a Design Contract Are Not Contrary to Montana Law
Zirkelbach Constr., Inc. v. DOWL, LLC, 2017 Mont. Lexis 591 (Mont., Sept. 26, 2017)
In interpreting a state statute which makes contractual limitations on a party’s liability unenforceable in certain instances, the Supreme Court of Montana recently upheld the validity of a contract provision in a professional services agreement between a general contractor and a designer in which the parties waived consequential damages against each other and limited the liability of the designer to $50,000.00.
Zirkelbach Constr., Inc. (“Zirkelbach”) and DOWL, LLC (“DOWL”) entered into a professional services agreement (the “Agreement”), whereby DOWL agreed to provide design work to Zirkelbach, a general contractor, for the construction of a FedEx Ground facility in Billings, Montana. The original contract price was $122,967, but was adjusted to approximately $665,000 after the parties made several addenda to the Agreement to account for additional services.
The Agreement contained a provision (the “limitation of liability clause”) – which the parties did not renegotiate when they modified the Agreement through addenda – in which the parties agreed to waive against each other “any and all claims for or entitlement to special, incidental, indirect, or consequential damages arising out of, or resulting from, or in any way related to the Project,” and also agreed that DOWL’s total liability to Zirkelbach under the Agreement “shall be limited to $50,000.”
After Zirkelbach brought suit against DOWL asserting claims of negligence and breach of contract in the amount of $1,218,197.93 for problems allegedly caused directly by DOWL’s design plans, DOWL filed a motion for partial summary judgment arguing that DOWL could not be liable to Zirkelbach in any amount exceeding $50,000 due to the limitation of liability clause. The District Court granted DOWL’s motion and Zirkelbach appealed.
On appeal, Zirkelbach argued that the limitation of liability clause was unenforceable as against public policy under Section 28-2-702, MCA, which provides:
The Supreme Court disagreed. In holding that the limitation of liability clause was valid under § 28-2-702, the Supreme Court emphasized the importance of the freedom of parties to mutually agree to the terms governing their private conduct, provided those terms do not conflict with public laws, and emphasized that Zirkelbach and DOWL were two experienced, sophisticated business entities with equal bargaining power. The Court relied on case law in both Montana and California, which has an identical statute, in concluding that “it would be difficult to imagine a situation where a contract between relatively equal business entitles would be able to meet the required characteristics of a transaction that implicated public interest.”
Additionally, the Court noted that the limitation of liability clause only capped damages and did not exempt DOWL from all liability under the Agreement, as the Court had previously held that § 28-2-702, is not violated when business entities contractually limit liability, but do not eliminate liability entirely, or when a limitation of liability applies only to a narrow type of damages, but not all damages. DOWL remained exposed to liability on the negligence claim asserted by Zirkelbach and for $50,000 under the Agreement.
Finally, the Court rejected Zirkelbach’s argument that the $50,000 limitation of liability indirectly exculpated DOWL from liability because it was a nominal amount compared to DOWL’s total adjusted fee. The Court pointed out that the limitation was a much larger percentage of DOWL’s fee before the parties modified the Agreement to add additional services by addenda, and stressed that it would not “allow Zirkelbach to avoid a term of the contract simply because it [had] become more burdensome due to its own failure to renegotiate.” Each time the Agreement was modified, Zirkelbach had an opportunity to renegotiate the cap on liability, but did not.
Accordingly, the Supreme Court affirmed the grant of summary judgment in DOWL’s favor.
The author, Emily D. Anderson, is an associate in the New York City office of the Pepper Hamilton Construction Practice Group.
In interpreting a state statute which makes contractual limitations on a party’s liability unenforceable in certain instances, the Supreme Court of Montana recently upheld the validity of a contract provision in a professional services agreement between a general contractor and a designer in which the parties waived consequential damages against each other and limited the liability of the designer to $50,000.00.
Zirkelbach Constr., Inc. (“Zirkelbach”) and DOWL, LLC (“DOWL”) entered into a professional services agreement (the “Agreement”), whereby DOWL agreed to provide design work to Zirkelbach, a general contractor, for the construction of a FedEx Ground facility in Billings, Montana. The original contract price was $122,967, but was adjusted to approximately $665,000 after the parties made several addenda to the Agreement to account for additional services.
The Agreement contained a provision (the “limitation of liability clause”) – which the parties did not renegotiate when they modified the Agreement through addenda – in which the parties agreed to waive against each other “any and all claims for or entitlement to special, incidental, indirect, or consequential damages arising out of, or resulting from, or in any way related to the Project,” and also agreed that DOWL’s total liability to Zirkelbach under the Agreement “shall be limited to $50,000.”
After Zirkelbach brought suit against DOWL asserting claims of negligence and breach of contract in the amount of $1,218,197.93 for problems allegedly caused directly by DOWL’s design plans, DOWL filed a motion for partial summary judgment arguing that DOWL could not be liable to Zirkelbach in any amount exceeding $50,000 due to the limitation of liability clause. The District Court granted DOWL’s motion and Zirkelbach appealed.
On appeal, Zirkelbach argued that the limitation of liability clause was unenforceable as against public policy under Section 28-2-702, MCA, which provides:
All contracts that have for their object, directly or indirectly, to exempt anyone from responsibility for the person’s own fraud, for willful injury to the person or property of another, or for violation of law, whether willful or negligent, are against the policy of the law.
Additionally, the Court noted that the limitation of liability clause only capped damages and did not exempt DOWL from all liability under the Agreement, as the Court had previously held that § 28-2-702, is not violated when business entities contractually limit liability, but do not eliminate liability entirely, or when a limitation of liability applies only to a narrow type of damages, but not all damages. DOWL remained exposed to liability on the negligence claim asserted by Zirkelbach and for $50,000 under the Agreement.
Finally, the Court rejected Zirkelbach’s argument that the $50,000 limitation of liability indirectly exculpated DOWL from liability because it was a nominal amount compared to DOWL’s total adjusted fee. The Court pointed out that the limitation was a much larger percentage of DOWL’s fee before the parties modified the Agreement to add additional services by addenda, and stressed that it would not “allow Zirkelbach to avoid a term of the contract simply because it [had] become more burdensome due to its own failure to renegotiate.” Each time the Agreement was modified, Zirkelbach had an opportunity to renegotiate the cap on liability, but did not.
Accordingly, the Supreme Court affirmed the grant of summary judgment in DOWL’s favor.
The author, Emily D. Anderson, is an associate in the New York City office of the Pepper Hamilton Construction Practice Group.
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