Vol. 3 No. 3		March 1984

Not every professional agrees with the concept; not every owner has been willing to accept it. Limitation of liability has been a subject of controversy in the construction industry for more than a decade. It has also been the subject of a certain amount of misunderstanding.

At the heart of the controversy lies a troublesome, often very personal issue. Many professionals are uncomfortable with the thought of shifting responsibility for the consequences of professional performance to someone else. They have great difficulty with the idea that they might somehow position themselves to walk away from damages arising out of their own negligence.

Yet, in spite of the reservations they might have, more and more architects and engineers are seeking to limit their liability--to their clients and, in some cases, to the contractors who work on their projects. It may be useful to examine why.

One of the principal functions of a good agreement is to allocate risk and responsibility in some reasonable way. Your professional services agreement is no exception. Underlying the negotiation of that agreement is the presumption that, in the end, it will produce a fair and equitable understanding.

What is fair and equitable? Most architects and engineers would agree it makes little sense to assume responsibilities they cannot meet, risks they cannot insure. They are willing to go to a good deal of trouble to eliminate provisions from their contracts calling for guarantees of professional performance or for assurances as to the work of others. They well understand there is a finite limit to the extent to which they can assist the owner in reducing the substantial risks inherent in a building project.

This widespread agreement seems to break down, however, as soon as the focus shifts from reasonable limits on promises of professional performance to limits on responsibility for any unintended, but adverse financial consequences. It is the impact on the design team of just such consequences that limitation of liability seeks to quantify and control.

Limitation of liability is based on the premise that not every (for some, not any) project is worth the assumption of unlimited risk. It is an attempt to define in dollar terms the level of responsibility to which an architect or an engineer will be held in the event something should go wrong. It implies there is some reasonable level beyond which the risk of loss properly belongs to someone else.

How does one distinguish between what might be reasonable and what not? Advocates of limitation of liability argue that the best way to approach this problem is to take the relative profit to be realized from a building project and use it as a measure of the stake each of the parties to the project actually holds. The rationale is that risk ought to bear some relationship to the anticipated gain.

Looking at the design and construction team with this measure in mind, it is clear that the one who stands to profit most from a successful outcome is the owner. In the private sector, the owner's expectation is that a healthy, annual return will be realized for the financial life of the project. At the end of the rainbow, there is the hope of a substantial capital gain.

In the public sector, and with nonprofit institutions, the situation is no different. Nothing is changed by the fact that the idea of "profit" is something of an anathema to most administrators. If public projects are not undertaken on the basis of a careful assessment of costs and benefits, most of which involve assumptions of beneficial use over an extended period of time, someone is not doing his or her job properly.

In either case, the contractor's one-time profit is modest by comparison with the owner's; yours pales in light of both. Thus, so the reasoning goes, the bulk of the risk in a building project ought to be assumed by the owner (even though most owners may not see it that way going in). If you accept this rationale, it follows that there may be a certain logic in the idea of placing some reasonable ceiling on the risk you assume for the privilege of assisting owners in their efforts to realize a significant financial gain.

This still leaves open the question of what a reasonable ceiling might be. In the end, it is a question likely to be answered by the courts. But, a number of legal advisors have expressed the opinion that a limitation of $50,000 (or the design fee for the project, whichever is greater) ought to meet most tests of reasonableness under most circumstances.

If this strikes you as somewhat arbitrary, there is an alternative: You might turn to the limits of liability on your policy of professional liability insurance. They reflect a reasoned judgment on your part as to your obligation to protect your business and personal assets. They represent the extent of your financial capacity to respond in the event of a loss. Beyond these limits, how much would you be willing to pay? How much could you pay?

Doubts have been raised by some about the enforceability of limitation of liability. They are based on the fact that statutes governing design and construction contracts in many states specifically prohibit certain forms of indemnification against the consequence of one's own negligence. Those who advance the concept respond that a reasonable allocation of risk, fairly bargained for, does not constitute indemnification. Thus far, the proponents have prevailed. Limitation of liability has not only withstood the test of legal challenge, but its enforceability has been codified in several states.

Detractors also point out that limitation of liability is not binding on third parties. This is true. A contractual agreement binds only the parties to the contract. But the protections it affords can be extended to include protections against third party claims, and on some projects, it may well be appropriate to make an effort to do so. Seek the advice of your attorney. The legal issues are complex.

Limitation of liability is not without its drawbacks, its implementation not without its difficulties. We will examine these aspects of the controversy from the points of view of the others involved in a future Part II. From your point of view, however, the most beneficial purpose limitation of liability might serve can be realized simply by raising it for discussion with your clients. It focuses attention on important issues of risk and responsibility--issues that might otherwise be glossed over in the atmosphere of excitement and goodwill that surrounds any new venture. By addressing these issues with clarity and candor at the outset, you can go a long way toward creating the realistic expectations you know you must have to avoid conflict in the end.