Enforceability of Limitation of Liability Clauses
Author: Saloni Shah and Joanna Kopcyzk
Limitations of Liability
Contractual limitations of liability are valid in Alabama. Gastrocare, PC v. TrxServices, LLC, No. 7:16-cv-01286, 2017 WL 2623768, at *6 (N.D. Ala. June 16, 2017) (finding that limitation of liability prevented plaintiff from meeting amount-in-controversy requirement for federal diversity jurisdiction.); Puckett, Taul & Underwood, Inc. v. Schrieber Corp., 551 So. 2d 979, 983 (Ala. 1989) (“[c]ommercial parties may contract freely to limit the remedies available to them”); see also McCollough Enters., LLC v. Marvin Windows & Doors, No. 09-0573, 2010 WL 5014670, at *7 (S.D. Ala. Dec. 2, 2010) (noting that the Alabama Code and “considerable case law” permit the limitation of liability). Alabama courts adhere to a “strong public policy interest favoring enforcement of contractual agreements entered into voluntarily by competent parties, unless they clearly contravene some positive law or rule of public morals.” Goodyear Tire & Rubber Co. v. J.M. Tull Metals Co., 629 So. 2d 633, 638 (Ala. 1993).
Alabama courts also recognize limitations of liability in service contracts. See Saia Food Distribs. & Club, Inc. v. SecurityLink from Ameritech, Inc., 902 So. 2d 46, 54 (Ala. 2004) (enforcing a limitation of liability provision in a security alarm monitoring services contract); Fox Alarm Co., Inc. v. Wadsworth, 913 So. 2d 1070, 1077 (Ala. 2005) (enforcing a limitation of liability clause in a contract between an alarm company and customer); but see, Gilbert v. Alarm One Inc., 426 F. Supp. 3d 1220, 1226 (N.D. Ala. 2019) (in wrongful death cases, waiver of right to sue for negligence does not bar suit for wantonness or liability under state law). The Alabama Code also permits the exclusion or modification of warranties in sales contracts, Ala. Code § 7-2-316 (West 2021), as well as the contractual modification or limitation of remedies, Id. at § 7-2-719. Accordingly, absent unconscionability, Alabama courts routinely uphold clauses limiting liability, including limits on direct and consequential damages. Fleming Farms & Lacy’s Spring Farms, Inc. v. Dixie AG Supply, Inc., 631 So. 2d 922, 925-27 (Ala. 1994).
Alabama courts generally enforce exculpatory clauses. See Baker v. Wheeler, Lacey & Brown, Inc., 128 So. 2d 721, 723-25 (Ala. 1961); Republic Steel Corp. v. Payne, 132 So. 2d 581, 585 (Ala. 1961); Barnes v. Birmingham Int’l Raceway, Inc., 551 So. 2d 929, 932-33 (Ala. 1989). While some courts distinguish between “active” and “passive” negligence in determining whether to uphold an exculpatory clause, Alabama courts reject this approach. Robinson v. Sovran Acquisition Ltd. P’ship, 70 So. 3d 390, 395 (Ala. Civ. App. 2011) (rejecting argument that exculpatory clause only shielded liability for passive negligence). However, exculpatory clauses affecting the public interest are invalid as contrary to public policy and must be measured against a six-factor test originally developed by the California Supreme Court. Morgan v. S. Cent. Bell Tel. Co., 466 So. 2d 107, 117 (Ala. 1985) (citing Tunkl v. Regents of the Univ. of Cal., 383 P.2d 441, 445 (Cal. 1963)). For example, exculpatory provisions are unenforceable where the party attempting to invoke the exculpatory provision exercised superior bargaining power so that the provision was not bargained for, but rather, was set forth in a standardized adhesion contract. Id.; see also Fox Alarm Co. v. Wadsworth, 913 So. 2d 1070, 1076-77 (Ala. 2005) (noting that the six-part test does not apply to limitation of liability clauses). In contrast, provisions merely limiting damages are not subject to these public policy concerns. Colonial Bancgroup, Inc. v. PricewaterhouseCoopers LLP, No. 2:11-cv-746, 2016 WL 9686250, at *8 (M.D. Ala. Aug. 25, 2016) (“[C]ontract provisions that bar consequential damages . . . are fully enforceable in Alabama . . .”). Exculpatory clauses that release one from liability for wanton or willful conduct are also considered contrary to public policy. Barnes v. Birmingham Int’l Raceway, Inc., 551 So. 2d 929, 932-33 (Ala. 1989); Reece v. Finch, 562 So. 2d 195, 200 (Ala. 1990). Alabama courts may also find a limitation of liability provision unconscionable when a latent defect is involved. See, i.e., Majors v. Kalo Labs., Inc., 407 F. Supp. 20, 23-24 (N.D. Ala. 1985).
Alabama does not have an anti-indemnity statute. Alabama courts enforce agreements allowing an indemnitee to recover from the indemnitor even for claims resulting solely from the indemnitee’s negligence, but only if such agreements are clear and unequivocal. Helton v. Brent Belcher Props., Ltd., 64 So. 3d 25, 31 (Ala. Civ. App. 2010). Parties wishing to execute indemnity contracts for negligence should expressly refer to the negligence of the indemnitee, unless the requisite intent is otherwise clear. Nationwide Mut. Ins. Co. v. Hall, 643 So. 2d 551, 557 (Ala. 1994); Scroggs v. WTI Transp., Inc., No. 1:14-cv-869, 2015 WL 12852971, at *5 (N.D. Ga. Jan. 13, 2015) (applying Alabama law).
Enforceability of Waiver of Consequential Damages Clauses
Alabama courts have not directly addressed the enforcement of waiver of consequential damages clauses in the construction context, but they have enforced such clauses in related and other contexts. For instance, in Harbor Commc’ns, LLC v. S. Light, LLC, 2019 WL 4264368 (S.D. Ala. Sept. 9, 2019), defendants filed a motion for summary judgment seeking dismissal of plaintiffs’ suit alleging breach of a settlement agreement related to a separate state court matter. Specifically, plaintiffs contended that defendants breached the agreement by, inter alia, failing “to leave or create space to accommodate a MUX [data selector device] in the buildout [defendants] performed[,]” and accordingly sought “damages including costs and attorneys’ fees.” 2019 WL 4264368, at *1. Applying Alabama law, the court denied defendants’ motion except with regard to damages, limiting the scope of plaintiff’s recoverable damages to direct compensatory damages because the settlement agreement expressly precluded recovery of special, indirect, incidental, or consequential damages. Id. at *6–7 (“It is clear that [plaintiffs] cannot recover damages for lost profits or lost opportunities….”).
Alabama courts generally enforce contract provisions that explicitly exclude recovery of consequential damages or indirect expenses. See, e.g., Stewart v. Bradley, 15 So. 3d 533, 542–43 (Ala. 2008) (finding that, pursuant to the parties’ “valid” limited-warranty agreement, defendants had waived “their right to seek damages for mental anguish”); Fox Alarm Co., Inc. v. Wadsworth, 913 So. 2d 1070, 1077 (Ala. 2005) (“[T]his Court has held that ‘limitations on damages that may be recovered are not, per se, against public policy.’” (citations omitted)); Saia Food Distributors & Club, Inc. v. SecurityLink from Ameritech, Inc., 902 So.2d 46, 53–55 (Ala. 2004) (upholding a contractual clause barring recovery of consequential or incidental damages); Sears Termite & Pest Control, Inc. v. Robinson, 883 So. 2d 153, 158 (Ala. 2003) (holding that a service contract was not rendered unconscionable by provision barring recovery of consequential and indirect damages, including emotional-distress damages, and noting in reference to the Uniform Commercial Code that the Alabama “Legislature has endorsed the validity of limitations on the recovery of consequential damages so long as they are not unconscionable.” (citing Ala. Code § 7-2-719(3), Ala. Code 1975)); Leonard v. Terminix Int’l Co., L.P., 854 So. 2d 529, 534–35 (Ala. 2002) (citation omitted) (holding that an arbitration clause was “not unconscionable solely because it purports to preclude a remedy for ‘indirect, special or consequential damages or loss of anticipated profits’” and stating that “[i]n Alabama, limitations on damages that may be recovered are not, per se, against public policy”); see also Colonial Bancgroup Inc. v. PWC LLP, 2016 WL 9686250, at *8 (M.D. Ala. Aug. 25, 2016) (“Contract provisions that bar consequential damages, but do not eliminate all other damages, are fully enforceable in Alabama against negligence claims.”); but see Standifer v. Best Buy Stores, L.P., 2019 WL 366616, at *4 (N.D. Ala. Jan. 30, 2019) (citation omitted) (acknowledging that “Alabama law recognizes the freedom to contract and upholds ‘clearly manifested limitations’ in a contract,” but finding a genuine issue of material fact as to whether the computer services contract’s limitation of liability clause – which stated, in part, that “in no event will [defendant] be liable for any indirect damages whatsoever” – applied “only to indirect damages arising out of a breach of the provisions of the … Agreement or if it also applies to all aspects of [defendant’s] relationship with its customers,” thereby precluding summary judgment on whether plaintiff had waived her non-contract claim to recover damages for unauthorized data transfer).
In the context of transactions for the sale of goods, the Alabama Uniform Commercial Code allows a buyer to recover consequential damages from the seller under appropriate circumstances. See Ala. Code §§ 7-2-711 – 7-2-714, 7-2-715(2). However, Alabama code section 7-2-719 permits the buyer and the seller to contract to limit or exclude consequential damages unless the limitation or exclusion is unconscionable or where the circumstances cause a contractually specified limited or exclusive remedy to fail of its essential purpose. See McCollough Enters., LLC v. Marvin Windows & Doors, 2010 WL 5014670, at *7–8 (S.D. Ala. Dec. 2, 2010) (finding that warranty provision excluding recovery of consequential damages was not unconscionable under Alabama law); Puckett, Taul & Underwood, Inc. v. Schreiber Corp., Inc., 551 So. 2d 979, 983 (Ala. 1989) (“Commercial parties may contract freely to limit the remedies available to them.”); Burbic Contracting Co., Inc. v. Cement Asbestos Prods. Co., 409 So. 2d 1, 5–6 (Ala. 1982) (upholding waiver of consequential damages as a reasonable remedies limitation); Peterbilt Motors Co. v. Martin, 521 So. 2d 946, 949 (Ala. 1988) (holding that a limitation on consequential damages will be excluded if a limited remedy fails of its essential purpose). Moreover, Alabama courts will apply the analysis found in cases that are based upon Alabama’s Commercial Code to other contract disputes. Turner v. Westhampton Court, L.L.C., 903 So. 2d 82, 91 (Ala. 2004) (“While these cases [upholding a warranty coverage limitation clause and a warranty notification provision] are based upon Alabama’s Commercial Code, we see no reason to limit the rule to cases concerning ‘goods.’ Rather, we are led by the principle of freedom of contract.”).
Application of Economic Loss Doctrine
Under Alabama law, the economic loss doctrine applies to bar any tort recovery for damages caused by a product defect where the only harm is to the product itself, resulting solely in failed economic expectations. Pub. Bldg. Auth. of City of Huntsville v. St. Paul Fire & Marine Ins. Co., 80 So. 3d 171, 184 (Ala. 2010) (quoting Vesta Fire Ins. Corp. v. Milam & Co. Constr., 901 So. 2d 84, 106–07 (Ala. 2004) (“The economic loss rule ‘prevents tort recovery when a product damages itself, causing economic loss, but does not cause personal injury or damage to any property other than itself.’”); see also Bay Lines, Inc. v. Stoughton Trailers, Inc., 838 So. 2d 1013, 1019 (Ala. 2002) (“[O]ne cannot recover in tort for negligent manufacture of a product where the only injury is to the product itself.”). The economic loss doctrine bars tort recovery for economic losses. When a plaintiff incurs exclusively economic losses caused by a product or service, the economic loss doctrine only allows the plaintiff to recover such losses under breach of warranty or breach of contract causes of action. The doctrine is judicially-created and commonly presented as a defense. The doctrine, as adopted by Alabama courts, does not prevent a tort action when the injury caused is personal in nature or is inflicted on other property. Pub. Bldg. Auth. of Huntsville, 80 So. 3d at 184.
Accordingly, in the construction law context, a plaintiff may bring a tort claim in addition to a breach of contract claim for defective work if the work causes damage to property. See Pub. Bldg. Auth. of Huntsville, 80 So. 3d at 184 (“[T]he trial court properly recognized that this Court has not applied the economic-loss rule to bar a tort claim in a commercial-construction context.”); see also Crum v. Johns Manville, Inc., 19 So. 3d 208, 216-17 (Ala. Civ. App. 2009) (declining to dismiss tort claims based on doctrine in a case of defective roofing system installation, because further evidence could show alleged leaks could cause damage to property inside or to other parts of the building). Alabama courts focus on “whether there exists a duty from which a tort might arise in a construction context.” Pub. Bldg. Auth. of Huntsville, 80 So. 3d at 184 (citation omitted). Such a duty can arise in construction cases regardless of whether privity exists between the plaintiff and defendant. RaCon, Inc. v. Tuscaloosa Cty., 953 So. 2d 321, 334 (Ala. 2006). In determining whether such a duty exists, Alabama courts focus on six factors, including: “(1) [t]he extent to which the transaction was intended to affect the other person; (2) the foreseeability of harm to him; (3) the degree of certainty that he suffered injury; (4) the closeness of the connection between the defendant’s conduct and the injury; (5) the moral blame attached to such conduct; and (6) the policy of preventing future harm.” Pub. Bldg. Auth. of Huntsville, 80 So. 3d at 185–86 (citation omitted).
Limited to Products Liability
Alabama courts have not expanded the economic loss doctrine beyond commercial product defects to services. Notably, the economic loss doctrine was not a defense in tort cases addressing damages incurred from repair work or damage that was not specifically caused by the “product” at issue. See, e.g., Dairyland Ins. Co. v. General Motors Corp., 549 So. 2d 44, 46–47 (Ala. 1989) (declining to apply the doctrine in allowing a claim for negligent repair of a new car); see also Vesta Fire Ins. Corp., 901 So. 2d at 106-07 (declining to apply the economic loss doctrine because there was no determination of whether fire damage was caused “by a ‘product’”).
Special Policy Exceptions
The U.S. District Court for the Northern District of Alabama recognized an exception to the application of Alabama’s economic loss doctrine for products that have an “inherently hazardous nature” that “necessitates removal.” Tuscumbia City Sch. Sys. v. Pharmacia Corp., 871 F. Supp. 2d 1241, 1253 (N.D. Ala. 2012). In doing so, the federal court distinguished prior Alabama case law applying the doctrine. Whereas in previous cases the products at issue were rendered unusable by their defects, in Tuscumbia the product was still useable, but deemed hazardous to the public. Id.
Additionally, Alabama law recognizes an exception to the doctrine for fraud in the inducement. Specifically, the Alabama Supreme Court “has often allowed a plaintiff to recover damages under a fraudulent-inducement theory for a purely economic loss to a product itself based upon value that is indicated by a seller’s representations but not actually received, even where the product was in fact working properly.” Ford Motor Co. v. Rice, 726 So. 2d 626, 631 (Ala. 1998).
Enforceability of No Damages for Delay Clauses
No damages for delay clauses are strictly construed, but generally enforceable in Alabama, absent delay: “(1) not contemplated by the parties under the provision; (2) amounting to an abandonment of the contract; (3) caused by bad faith; or (4) amounting to active interference.” RaCON, Inc. v. Tuscaloosa Cnty., 953 So. 2d 321, 339 (Ala. 2006) (quoting E.C. Ernst, Inc. v. Manhattan Constr. Co., 551 F.2d 1026, 1029 (5th Cir. 1977)).
Strict Interpretation of Contract
Alabama courts follow the rule of strict interpretation of contracts. Under Alabama rules of contract interpretation, “‘the intent of the contracting parties is discerned from the whole of the contract.’” Once Upon a Time, LLC v. Chappelle Properties, LLC, 209 So.3d 1094, 1097 (Ala. 2016) (quoting Homes of Legend, Inc. v. McCollough, 776 So.2d 741, 746 (Ala. 2000). If there is no indication that the terms of the contract are used in a special or technical sense, the terms will be given their ordinary, plain, and natural meaning. Id., see also Chris Myers Pontiac-GMC, Inc. v. Perot, 991 So.2d 1281, 1284 (Ala. 2008) (quoting Brewbaker Motors, Inc. v. Besler, 776 So. 2d 110, 112 (Ala. 2000)). Alabama courts will construe the terms of the contract so as to give each term full effect, and parties will be “presumed to have intended what the terms clearly state.” Title Max of Birmingham, Inc. v. Edwards, 973 So.2d 1050, 1054 (Ala. 2007) (quoting H & S Homes, L.L.C. v. Shaner, 940 So.2d 981, 988 (Ala. 2006). If a contract provision is ambiguous, courts may look to the surrounding circumstances and the construction the parties gave the language. H.R.H. Metals, Inc. v. Miller ex rel. Miller, 833 So.2d 18, 24 (Ala. 2002). A contract is ambiguous if more than one meaning emerges from the reading of the contract. Drummond Co., Inc. v. Walter Industr., Inc., 962 So.2d 753, 780 (Ala. 2006). An ambiguity within a contract should be construed against the drafter of the contract. SouthTrust Bank v. Copeland, L.L.C., 886 So.2d 38, 43 (Ala. 2003). However, this rule is one of last resort, and contract terms will not be construed against the party who framed them “if other rules of construction would be thwarted in their legitimate operation by the application of [this] rule of construction.” FabArc Steel Supply, Inc. v. Composite Const. Systems, Inc., 914 So.2d 344, 357-58 (Ala. 2005) (quoting Denson v. Caddell, 77 So. 720, 722 (1917)).
Prompt Payment Requirements (Public/Private)
Alabama Public –Ala. Code § 41-16-3 (2022) (owner to prime 30 days after invoice; prime to sub/sub to lower tier 7 days after payment unless otherwise agreed; interest at current statutory rate).
Alabama Private (excluding residential contracts or contracts < $10k) – Ala. Code §§ 8-29-3 to 8-29-8 (2022) (owner to prime 30 days after invoice, unless otherwise agreed; prime to sub/sub to lower tier 7 days after payment unless otherwise agreed; interest at 1% per month, 12% per annum).
False Claims Statute
Federal False Claims Act – 31 U.S.C. § 3729-3733 –
Many states have enacted false claims statutes modeled on the federal False Claims Act (referenced as the “FCA” throughout this survey). 31 U.S.C. §§ 3729-3733. State analogues to the FCA aim to address claims involving state and local governments instead of the federal government. This summary identifies the FCA’s state analogues for construction claims. It does not address false claims statutes for other subjects, such as health care claims, applications for public assistance, or insurance claims.
The FCA defines “claim” as any request or demand for money or property where the government will provide or reimburse any portion of that money or property. Id. § 3729(b)(2). The FCA imposes civil liability for any of seven separate acts including: 1) knowingly presenting a false claim for payment; 2) knowingly making a false record or statement to obtain approval of a claim; 3) conspiring to obtain approval of a false claim; 4) knowingly delivering less than the amount of money or property owed to the government; 5) delivering a receipt for government property without knowledge of the receipt’s veracity and with intent to defraud; 6) knowingly purchasing or receiving public property from a government employee or member of the Armed Forces illegally; and 7) knowingly making or using a false record or statement to decrease a payment obligation to the government. Id. § 3729(a)(1).
A person found guilty of any of the above acts is liable to the government for: 1) a civil penalty between $5,000 and $10,000, as adjusted by inflation; 2) three times the amount of damage sustained by the government; and 3) the costs of a civil action brought to recover damages sustained by the government. Id. § 3729(a)(1-3). The FCA, however, allows mitigation of the penalty if the violator cooperates with the government’s investigation. Courts may reduce the violator’s liability to two times the amount of damage sustained by the government when the violator: 1) provides all of the information known about that violation to the investigative team within 30 days of gaining such knowledge; 2) provides the information without actual knowledge of the investigation and before the government files charges; and 3) fully cooperates with the government’s investigation. Id. § 3729(a)(2).
Alabama – N/A
Licensing Requirements for Construction Managers
Alabama expressly requires construction managers to obtain a general contractor’s license. Ala. Admin. Code r. 230-X-1-.10(1). A construction manager’s duties and responsibilities should be defined in the contract between the owner of the project and the construction manager, and the contract must require that the construction manager supervise the construction. Id. 230-X-1-.10(3).