Tuesday, April 01, 2008, 5:55 PM

COA Upholds Contractual Limitation Of Liability

Today the Court of Appeals (COA) upheld a contractual limitation of liability clause which capped damages at $50,000. The case is Blaylock Grading Co., LLP v. Smith. Chief Judge Martin authored the decision.

Defendants, an engineering company and its principal, entered into a contract with plaintiff, a grading company, to provide land surveying services. The contract contained a "Risk Allocation" provision limiting defendants' liability. It said: "[Liability to plaintiff] for any and all injuries, claims, losses, expenses, damages or claim expenses arising out of this agreement, from any cause or causes, shall not exceed the total amount of $50,000, [or] the amount of [defendants'] fee (whichever is greater) . . . . Such causes include, but are not limited to, negligence, errors, omissions, strict liability, breach of contract or breach of warranty."

Defendants negligently surveyed land, requiring plaintiff to import fill to raise the elevation of the site. Plaintiff sued for negligence and breach of contract. Defendants moved for partial summary judgment, claiming the Risk Allocation clause limited damages to $50,000. The trial court denied the motion. A jury found that defendants breached the contract and were negligent and awarded plaintiff $574,714. After the verdict, the trial court held that the Risk Allocation provision was void as against public policy and entered judgment on the jury verdict. Defendants appealed.

The COA reversed, holding that the Risk Allocation clause wasn't void as against public policy. Thus, plaintiff's damages presumably will be capped at $50,000.

The COA relied on Gas House, Inc. v. Southern Bell Tel. & Tel. Co. , 289 N.C. 175 (1976), which upheld a limitation of liability. The COA noted that plaintiff in today's case stipulated that there were no formation irregularities in the contract and that it wasn't unconscionable. "Plaintiff and defendants are sophisticated, professional parties who conducted business at arms' length ...." The COA emphasized that defendants aren't a common carrier or a provider of a public utility, and thus plaintiff couldn't rightly invoke a rule that's sometimes called the "public service exception": a limitation of liability is void if issued by a common carrier or public utility with respect to its provision of public services.

The trial court had mistakenly concluded that the "public services exception" should apply in this case since engineers and land surveyors are regulated and must be licensed. The COA disagreed and made two observations. First, the mere fact that a field (like surveying) is regulated and has a licensure requirement doesn't automatically convert it into a public service. Second, "when a breach of contract between two parties involves only economic loss, as in the present case, the health and safety of the public are not implicated" in an action between the contracting parties.

Today's case is a reminder that limitation of liability clauses in arms' length contracts between commercial organizations (or otherwise sophisticated parties) will be upheld absent the most extraordinary of circumstances.

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