Following the construction industry and related legal topics in the United States.

Wednesday, February 28, 2007

Lid On North Carolina Engineer’s Liability Cap

A grading contactor working on a Fort Bragg housing project entered into a written contract with an engineer/surveyor. The contract included a "Risk Allocation" clause limiting the engineer's liability to the greater of $50,000 or the engineering fee. Due to a 1.7 foot grade benchmarking error by the engineer, the grading contractor had to install additional compacted fill exceeding $638,000. The engineer offered to pay the grading contractor $50,000 – the maximum amount under the "Risk Allocation" clause, but the grading contractor refused. The case went to trial and the jury found against the engineer for approximately $575,000. See: Blaylock Grading Company, LLP v. Neal Everett Smith and Neal Smith Engineering, Inc., Harnett County North Carolina Superior Court Docket No. 06-CVS-00070.

The engineer argued against numerous alleged irregularities in trial, including the court's determination that the "Risk Allocation" clause was unenforceable as a matter of law as violating public policy. It is not clear whether the court was persuaded by the grading contractor's argument that the "Risk Allocation" clause is against public policy simply by virtue of the fact that the engineer is a licensed professional under NCGS Chapter 89C; or the novel argument that the engineer's attempt to limit liability is prohibited by NCGS Chapter 22B – presumably NCGS Chapter 22B-1 - which appears to be the anti-indemnity statute (the liability cap being analogous to the engineer being indemnified for its own negligence).

As to enforceability of limitation of liability clauses, states that reject them see them as unenforceable indemnity agreements; and states that allow them see them as the mere shifting of risk. North Carolina courts have generally endorsed limitations of liability clauses. However, it will be interesting to see how a North Carolina Court will rule on the narrower issue of whether the NCGS Chapter 22B-1 anti-indemnity statute applies to a design professional's contractual limitation of liability clause.

This case is reportedly heading to appeal and is being closely watched by professional architect (AIA North Carolina) and engineering (PENC) organizations in North Carolina, who have told this writer that they plan to file friends of the court briefs in support of a design professional's ability to contractually limit its liability.

Stay tuned for a Court of Appeals decision that will either be a blessing or curse for the North Carolina design professional community. (This entry was published by Ken Michael of Womble Carlyle's construction and real estate development group).


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