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


Monday, July 28, 2008

NC Court of Appeals Holds That Risk Allocation Provision Does Not Violate North Carolina Anti-Indemnification Statute

Indemnification and limitation of liability provisions are commonplace in construction contracts. By statute in North Carolina (N.C. Gen. Stat. § 22B–1 (2007)), any contractual agreement relating to the design, planning, construction, alteration, repair or maintenance of a building, road, appurtenance or appliance purporting to indemnify a party against liability for damages caused by such party’s own negligence, in whole or part, is unenforceable. This rule extends to the party’s independent contractors, agents and employees as well.

Recently, the North Carolina Court of Appeals clarified that N.C. Gen. Stat. § 22B-1 (2007), North Carolina’s version of the so-called “anti-indemnification statutes” that have been enacted across the country, does not apply to a limitation of liability provision agreed to by parties to a contract in the context of construction.

In Blaylock Grading Co. v. Smith, 658 S.E.2d 680 (2008), the North Carolina Court of Appeals upheld a “risk allocation” provision contained in a construction contract that limited the amount of liability that could be imposed on the defendant for the consequences of his own negligence. In Blaylock, the plaintiff, a grading company, brought a claim of breach of contract and negligence against the defendant, the surveyor on the project. On the issue of liability, the jury determined that the defendant breached the contract with the plaintiff and was negligent in the performance of its surveying duties. On the issue of damages, the jury found that the defendant was liable for over $500,000. The defendant appealed arguing that the Risk Allocation provision in the contract limited the defendant’s ultimate liability to $50,000.

On appeal, the Court of Appeals held that § 22B–1 did not apply in this case, noting that the statute only prevents one party to a contract from agreeing to be liable for the negligence of the other party to a contract. By contrast, the Risk Allocation provision contained in the contract at issue only limited the amount of damages recoverable by one contracting party from the other and did not impose liability and damages on the plaintiff for the defendant’s negligence. Consequently, the Court held that the Risk Allocation provision did not violate N.C. Gen. Stat. § 22B-1 (2007).

Thus, the lesson to be learned for contract draftsmen is that risk allocation provisions are a viable and powerful means to limit prospectively the damages for which a company may be liable. (This entry was published by Culley Carson, a member of Womble Carlyle's construction law practice group.) (PDF)

Source: Blaylock Grading Co. v. Smith (PDF)

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