The Devil Is In The Details When It Comes To Construction Contracts

Construction Group Newsletter
(Robert J. MacPherson)
January 29, 2010
In a case examining what on its face appeared to be a fairly standard contract for architectural services, the United States District Court for the District of New Jersey in Atlantic City Associates LLC v. Carter & Burgess Consultants, Inc., 2008 U.S. Dist. LEXIS 93684 (D.N.J. Nov. 13, 2008) held (1) that a limitation of liability clause appearing in the architect’s proposal was not part of the contract even though the proposal itself had been made part of the contract; (2) a clause under which the Architect agreed to indemnify the project Owner against “any and all claims” was not limited to claims against the Owner by third parties: and (3) that a mutual waiver of consequential damages limited the Owner to recovery of direct damages under the indemnification provision.

Carter & Burgess Consultants, Inc., (“C&B” or “Architect”) submitted a proposal to Atlantic City Associates, LLC (“ACA” or “Owner”) to provide architectural services for a mixed retail and commercial use property in Atlantic City, New Jersey known as “The Walk”. C&B’s proposal included a provision limiting C&B’s liability to C&B’s fee. The parties later entered into a contract which incorporated the proposal, but said that in the event of a conflict between the contract and the proposal, the contract would govern. The contract also contained a waiver of consequential damages provision, which provided that the parties mutually waived the right to consequential damages for claims arising out of the contract, and an indemnity provision, which provided:

“The Architect agrees to indemnify, hold harmless, protect the Owner and the Owner’s agents … against any all claims, loss, liability, damage, costs and expenses, including reasonable attorneys fees, to the extent caused by the negligent acts, errors or omissions of the Architect, …”

The project experienced delays and in litigation commenced by the Owner, the Architect and the Owner blamed each other for the delays. In cross-motions for summary judgment each sought a ruling from the court on the proper interpretation and effect of the limitation of liability clause, the waiver of consequential damages clause, and the indemnity clause.

The Architect argued that the waiver of consequential damages provision covered any claims that the Architect or the Owner might have, regardless of whether the claims were based upon the contract or tort (negligence), and, as such, the Owner’s claims were barred. The Owner argued that the consequential damage waiver was part of a form contract and that the more specific indemnity provision, which was included in a document entitled “Modifications,” governed. The Owner asserted that when these provisions were read together the proper interpretation was that the Owner had waived claims for consequential damages arising out of a breach of contract, but had not waived claims for consequential damages arising out of the Architect’s negligent acts. In response, the Architect claimed that the indemnity provision was intended to be limited to third party claims made by others against the Owner and did not apply where the Owner was making a direct claim against the Architect.

The Court held that the indemnification provision and the consequential damages waiver should not be read in isolation, and that the two provisions could be harmonized when read in context and giving meaning to the entire contract. . Reading the two clauses together, the Court held that the indemnification provision as written was not limited to claims by third parties and encompassed direct claims by the Owner against the Architect for the Architect’s negligence. The Court also held, however, the Owner could only recover direct damages against the Architect, because the mutual waiver of consequential damages applied to any claim as between the parties.

The Court then addressed the limitation of liability provision found in the Architect’s proposal. The Owner argued that the limitation on liability, which limited the Owner’s recovery to the Architect’s fees, was in conflict with the indemnity provision, which provided the Architect would indemnify the Owner against “any and all claims, loss, liability, damage, costs, expenses”. The Owner also argued that the limit on the Architect’s liability was in conflict with another contract provision requiring the Architect to provide errors and omissions insurance in the amount of $5 Million Dollars, while the fee to be paid to the Architect was considerably less.

The Court held that the limitation of liability clause was in conflict with the indemnity provision and that the indemnity provision controlled.. The Court based its ruling on another provision in the contract which provided that the proposal, which contained the limitation on liability, was incorporated into the contract “except where it might result in a conflict” and in that case the contract would prevail. Finding a clear conflict between the limitation of liability provision and the indemnity provision, which did not limit liability, the Court held that the indemnity provision controlled.

As is typical on construction projects, the contract between the parties was made up of many parts. In this case, unfortunately, those parts were not coordinated.. While the Architect thought it had negotiated a limit to its liability, another clause in the contract took away this protection. Likewise, the Architect perhaps thought that since the base contract document was a standard form of agreement it was not exposing itself to any liability beyond that contained in the standard form. However, in this case the standard form was modified by a very broad indemnification provision. Indemnification provisions must always be approached cautiously and there are few, if any, reasons to agree to an indemnification provision as broad as this one. A commercially reasonably indemnification provision, and those typically found in construction contracts, limit the indemnification obligation claims by third parties for bodily injury or property damage caused by the indemnitor’s negligence.

What was not addressed by the Court in this case was whether the Owner’s attorneys fees, recoverable under the indemnity provision, would be considered a direct damage the Owner could recover or whether they are consequential damages the Owner has waived.