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Limitation of Liability Clauses

Question

Is it ethical for an engineer to seek language in contracts with clients or other contractors limiting liability for his or her negligence?

Discussion

Canon 4 of ASCE’s Code of Ethics states that “engineers shall act in professional matters for each employer or client as faithful agents or trustees, and shall avoid conflicts of interest.” While other provisions of the code are unequivocal in proscribing certain types of conduct, the use of the phrase “avoid conflicts of interest” reflects an understanding that certain conflicts of interest are inescapable in transactions between engineers and other parties. One such transaction is the allocation of risk and liability.

In the engineering field and in other professions, clauses in professional service agreements limiting liability have long figured in ethics discussions as well as in litigation. Some critics of these clauses have argued that professionals have a fundamental obligation to exercise due care in rendering services and that any professional who fails to meet this obligation should bear the full responsibility for that failure. Other critics point to the disparity in expertise between the professional and his or her client and challenge the appropriateness of a professional limiting liability for his or her conduct when the other party in the transaction may not have a sufficient understanding of the likelihood and magnitude of risk.

In view of this disparity in knowledge and expertise, many state codes of conduct governing the legal profession prohibit attorneys from executing clauses that limit their own liability, and other state codes permit such clauses only when the client is independently represented by other counsel when negotiating such an agreement. In the 1994 case Viner v. Brockway, a California court used similar reasoning in rejecting a limitation of liability clause in a contract between an engineer and a homeowner, noting that neither the homeowner nor his attorney had sufficient knowledge of the technical aspects of the contract to make an informed decision on allocating risk.

In response to those criticisms, proponents of clauses limiting liability have observed that a professional can provide services to the public only if the professional can sustain his or her practice as a going concern. They note that because of the nature and significance of services in such fields as medicine, law, and engineering, even small transactions with low fees can expose professionals to virtually limitless liability in the event of a mistake or omission. Furthermore, this imbalance between risk and reward makes it difficult for such professionals to maintain insurance or other protection against potentially ruinous lawsuits. ASCE’s Policy 318 (“Professional Liability/Tort Reform”) notes that excessive litigation can undermine engineering science because it has a chilling effect on the development of products and designs. In view of these difficulties and the great public benefit conferred by these professionals, proponents argue that liability limitations are not only appropriate but also necessary to ensure the continued availability of these vital professional services.

In the medical field, a number of states have addressed the need to control professional risks by imposing statutory limits on the amounts plaintiffs can recover in malpractice litigation. In the engineering field, a number of state courts, on the basis of the 1995 case Valhal Corp. v. Sullivan Assoc., have upheld clauses limiting liability in professional service contracts as a “reasonable allocation of risks between private parties,” particularly in cases where both parties are informed, sophisticated entities, there is equal bargaining power, and the damages do not involve personal injury or loss of property.

From an ethics standpoint, while limitation of liability clauses (and risk allocation in general) represent a situation in which the interests of the professional and those of his or her client are at odds, such clauses should not be deemed inconsistent with ethical conduct and indeed may very well be necessary if engineers are to continue to provide professional services to safeguard, according to canon 1 of ASCE’s Code of Ethics, “the safety, health, and welfare of the public.” Options for limiting liability are included in the standard contract documents developed by the Engineers Joint Contract Documents Committee. These documents allocate risk in a way that offers clear and transparent terms for review by the parties. They also reflect a reasonable consideration of personal accountability, a balance of risks and rewards, and an understanding of each party’s ability to prepare for and mitigate losses.

Professionals wishing to include limitation of liability clauses in contractual agreements should seek the advice of local counsel to ensure that such language is consistent with the statutes and judicial precedents in their states. Recently, in Witt v. La Gorce, a Florida appellate court issued a ruling declaring clauses limiting liability for professional services unenforceable in Florida, and other state courts have issued rulings against limitation clauses deemed to be overly broad or where there is a perceived difference in bargaining power. The engineer in Witt v. La Gorce has filed a motion for reconsideration of the decision, and the issue is being monitored by a number of professional societies, including ASCE. As always, proper risk management entails not just the appropriate contract language but also sound engineering judgment and an adequate level of professional liability insurance coverage. 

Members who have an ethics question or would like to file a complaint with the Committee on Professional Conduct may call ASCE’s hotline at (703) 295-6061 or (800) 548-ASCE (2723), extension 6061. The attorneys staffing this line can provide advice on how to handle an ethics issue or file a complaint. Please note that individual facts and circumstances vary from case to case and that the general summary information contained in these case studies is not to be construed as a precedent binding upon the Society. 
 

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