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Posts Tagged ‘contracts’

LOL (Limitation of Liability) Clauses in A&E Contracts: He who laughs last, laughs best

Posted on: October 11th, 2017

By: Cheryl H. Shaw

It’s no coincidence that the abbreviation for “Limitation of Liability” is LOL. That’s the reaction design professionals often get when they include an LOL clause in a contract proposal. LOL or “exculpatory” clauses limit the designer’s liability for future claims—usually to the cost of services or a fixed dollar amount. Clients frequently balk at these clauses, but since the client reaps the bulk of the rewards for a successfully completed project (vs. the designer who’s “reward” is limited to his fee), shouldn’t the client also shoulder the bulk of the risk?

In Georgia, design professionals can contractually limit their liability for negligence. However, the LOL clause must be narrowly drafted so it does not violate Georgia’s anti-indemnity statute1. This means, among other things, that the clause should limit the designer’s liability to his client only, and not to third-parties who are “strangers” to the contract. Attempts to avoid liability to third-parties may render the entire clause unenforceable even if the claim is actually asserted by the client.

Additionally, because an LOL clause contemplates satisfaction of future claims and waives substantial rights, it must be “explicit, prominent, clear and unambiguous” in the contract. In determining if a clause is sufficiently prominent, Georgia courts consider several factors, including whether the clause is contained in a separate paragraph; whether the clause has a separate heading; and whether the clause is distinguished by features such as font size.

In one case, the Georgia Court of Appeals found an LOL clause unenforceable where it was “camouflaged” in the same font as the surrounding contract provisions and was listed under the heading “miscellaneous” instead of having its own separate paragraph. Conversely, an LOL clause contained entirely in its own paragraph, in bold and underlined text, and announced in a heading that clearly informed the reader of the clause’s content was sufficiently prominent.

A well-crafted LOL clause can be an effective tool to cap exposure in the event a lawsuit is filed and should be considered when negotiating contracts for professional services. If the client does, in fact, “laugh out loud” in response to your proposal, one strategy is to provide the option: You can either perform the services without an LOL clause for one fee, or you can lower the fee if the client will accept the clause.

FMG’s Construction Law practice group is here to assist you in drafting these important contact provisions. If you have questions or would like more information, please contact Cheryl H. Shaw at [email protected].

Minnesota High Court Rules that Additional Insured is not Covered in the Absence of Negligence of the Named Insured

Posted on: March 28th, 2013

By: Bart Gary

Construction ZoneMany contracts, especially construction contracts, will contain a provision whereby one party, usually a subcontractor, agrees to add the other party to the contract, usually the general contractor, as an additional insured on the former’s insurance coverage. Where the additional insured has its own coverage, the question arises as to whether there are in effect multiple insurance coverages for the additional insured, and whether the named insured’s insurance policy must answer for claims against the additional insured.

The Supreme Court of Minnesota was confronted with a very unusual set of facts. A general contractor was an additional insured in the liability policy of its subcontractor. The general contractor directed the subcontractor where to install sheet piles; however, the subcontractor actually drove the piles and thereby damaged underground pipes. A jury had determined that the subcontractor was not negligent in damaging the pipes.  The general contractor nevertheless contended that it was covered under the subcontractor’s liability insurance policy as an additional insured.

The Court held that the additional insured endorsement in the subcontractor’s insurance policy is plainly for vicarious or derivative liability of the additional insured based upon the negligence of the principal, or named, insured. Vicarious liability arises where one party, for example an employer, is liable for the conduct of an employee by the relationship. Since the general contractor could be vicariously liable only if the subcontractor was liable, the jury’s exoneration of the subcontractor meant that the general contractor was not covered as an additional insured on the subcontractor’s policy. Eng’g. & Constr. Innovations, Inc. v. L.H. Bolduc Co., 825 N.W.2d 695 (Minn. 2013).

Beware If You Have Commissioned Employees in California – New Law Takes Effect in 2013

Posted on: December 27th, 2012

By: Brad Adler

For those employers that have operations in California, remember that California’s new commission contract law takes effect January 1, 2013.  Under State Law 1396, employers who pay commissions to their employees are required to enter into written commission agreements with them.  The agreement must describe the terms of the commission structure, including the method by which commissions will be calculated.  Employers must have employees sign the agreement and then provide a copy to each employee.  Employers also should note that, when a commission agreement expires for a current employee without being replaced by another agreement, the terms of the expired agreement will control.

Statutes Affecting Indemnification Agreements in Construction Contracts

Posted on: November 6th, 2012

By: Kamy Molavi

It is quite common for parties involved in construction projects to include indemnity provisions within their construction contracts. In recent years, a majority of states have enacted anti-indemnity statutes that restrict, modify, or invalidate indemnification agreements in construction contracts. With respect to the degree of fault against which indemnity may be barred, two types of anti-indemnity statutes have emerged across the nation. We refer to them as “sole negligence” statutes and “any negligence” statues.

Nearly half of the state anti-indemnity laws void provisions that attempt to require the indemnitor to indemnify the indemnitee for the indemnitee’s sole negligence or willful misconduct. Indemnity in “sole negligence” states is allowed when the indemnitor and indemnitee are each partially at fault, or a portion of fault can be attributed to a third person. Stated another way, under these statutes an indemnitor may have to pay for the injury even if the indemnitee is 99 percent responsible for the injury. Further, in most states that only invalidate “sole negligence” provisions in indemnity contracts, workers compensation and insurance agreements are not affected by the “sole negligence” indemnity prohibition in the statute. However, several state statutes are silent on these issues. Examples of typical “sole negligence” anti-indemnity statutes are those enacted in Alaska and Georgia.

Several states have enacted versions of a different variety of anti-indemnity statute, referred to as “any negligence” states. This type of anti-indemnity statute voids contract provisions that require indemnification for losses or damages arising out of the indemnitee’s negligence, whether sole or partial. Thus, this type of anti-indemnity statute would necessarily include “sole negligence” prohibitions.  In states that have “any negligence” anti-indemnity statutes, the indemnitee is more restricted from shifting the risk onto a non-negligent party than in “sole negligence” states.

Recent case law addressing anti-indemnity laws has highlighted some of the fine points in the statutes and public policies of the states. One current issue is whether the contract qualifies as a “construction contract” and thus is subject to the state’s anti-indemnity statute.  All of the states that have analyzed this issue recently have decided that the term “construction contract” in the anti-indemnity statutes should be interpreted broadly. Georgia courts, for example, have interpreted the anti-indemnity statute broadly to apply to assignment agreement transferring the maintenance and repair of a residential subdivision to the homeowners association. Likewise, New Mexico has interpreted the applicability of its anti-indemnity statute to encompass maintenance activities in improving a property and agreements for rental equipment to be used in construction activities.

Another recent trend involves the interplay between indemnity and insurance, and specifically those statutes which contain an “insurance savings” clause. These situations arise in states where the anti-indemnity statute expressly prohibits contractual provisions that require the indemnitor to indemnify the indemnitee for the indemnitee’s negligence, and also expressly state that the code section does not affect the validity of an insurance contract and/or any other agreement issued by an insurer. An example of an insurance savings clause is in the Alaska statute that states it does not affect the validity of insurance policies. The interplay between these two statutory provisions has not uniformly interpreted among the various jurisdictions. As one example in a coverage dispute, the Delaware Supreme Court found that despite the public policy against indemnification for someone else’s negligence, whether the indemnification is direct or indirect, the “insurance savings provision” is enforceable. The Delaware Supreme Court stated that insurance companies are sophisticated and should not be able to use the anti-indemnity statute as a shield to decline coverage after it is purchased.

Some states are statutorily silent with respect to the validity of indemnity agreements in construction contracts, but their courts recently have addressed the issue. For example, the Nevada Supreme Court recently found that a party can be contractually required to indemnify another for the indemnitee’s negligence, but only if the contract for indemnity contains “an express or explicit reference to the indemnitee’s own negligence.” Thus, a general statement requiring the indemnitor to indemnify the indemnitee for “any and all claims” is not sufficient in Nevada.

In summary, if a loss arises and any applicable contract contains an indemnification clause, it is imperative for construction contractors and designers, as well as their claims adjusters and attorneys, to carefully review governing statutes and court opinions in order to determine whether the indemnification clause is enforceable, and if so, to establish the types of claims and damages to which the clause may apply.

This article is excerpted from materials for a Defense Research Institute seminar presented in Phoenix, AZ, in September of 2012. For a copy of the complete article, including a chart of various statutes, click here.