Enforceability of Limitation of Liability Clauses
Author: Saloni Shah and Joanna Kopcyzk
Limitations of Liability
Arkansas courts enforce limitations of liability in service contracts. Nat’l Union Fire Ins. Co. of Pittsburgh, Pa. v. Guardtronic, Inc., 64 S.W.3d 779, 785 (Ark. Ct. App. 2002) (recognizing limitation of liability clause in a contract for alarm monitoring services); J.D. & Billy Hines Trucking, Inc. v. Hale Land & Cattle Co., No 4:15-cv-04011, 2016 WL 7444960, at *2-3 (W.D. Ark. Dec. 27, 2016) (enforcing limitation of liability clause in hauling agreement).
Pursuant to Section 4-2-719 of the Arkansas Code, parties to sales contracts may also contractually modify or limit consequential damages unless unconscionable. Ark. Code Ann. § 4-2-719(3) (West 2021). Courts evaluate unconscionability “in light of general commercial background, commercial needs in the trade or the particular case, the relative bargaining positions of the parties, and other circumstances existing when the contract was made.” Ciba-Geigy Corp. v. Alter, 834 S.W.2d 136, 147 (Ark. 1992). In Dessert Seed Co. v. Drew Farmers Supply, 454 S.W.2d 307 (Ark. 1970), the Supreme Court of Arkansas found a limitation of liability clause unreasonable, unconscionable, and against public policy when the seller’s negligence was clearly established, and the buyer was unable to discover the defect in the goods. Id. at 311. Limitations of liability should employ clear and unmistakable language to permit enforcement. Gramling v. Baltz, 485 S.W.2d 183, 189-90 (Ark. 1972) (rejecting disclaimer of consequential damages because provision was unclear).
In Arkansas, exculpatory clauses are not “invalid per se” but are disfavored and strictly construed against the party seeking enforcement. Plant v. Wilbur, 47 S.W.3d 889, 892-93 (Ark. 2001); see also Nat’l Union Fire Ins. Co. of Pittsburgh, Pa. v. Guardtronic, Inc., 64 S.W.3d 779, 782 (Ark. 2002) (collecting cases); Trujillo v. TK Martial Arts Acad., LLC, 474 S.W.3d 519, 523-24 (Ark. Ct. App. 2015) (upholding release since it clearly set out what negligent liability was to be avoided). Under the “total transaction” approach, Arkansas courts consider the language of the release and the “facts and circumstances surrounding the execution of the release in order to determine the intent of the parties.” Stewart v. Nucor Corp., No. 3:13-cv-00057, 2015 WL 5944920, at *3 (E.D. Ark. Oct. 13, 2015) (enforcing exculpatory clause in personal injury action involving plaintiff with high school diploma and having deemed plaintiff to have read and understood the waiver he signed.) An exculpatory clause may be enforced: (1) when the party is knowledgeable of the potential liability that is released; (2) when the party is benefitting from the activity which may lead to the potential liability that is released; and (3) when the contract that contains the clause was entered into freely and fairly. Ingersoll-Rand Co. v. El Dorado Chem. Co., 283 S.W.3d 191, 195 (Ark. 2008) (internal citation omitted). Exculpatory provisions must also be clear and specific. Plant, 47 S.W.3d at 893. Arkansas courts will not enforce broad or generally described limitations. See Farmers Bank of Greenwood v. Perry, 787 S.W.2d 645 (Ark. 1990) (refusing to give effect to a general disclaimer of liability because it failed to specifically refer to negligence).
Ark. Code Ann. § 4-56-104(b) (West 2021) invalidates clauses in private construction contracts requiring an entity to indemnify or hold harmless another against liability for damage arising out of the death of or bodily injury to a person or damage to property arising out of the indemnitee’s negligence. Ark. Code Ann. § 22-9-214(b) (West 2021) prohibits the same clauses in public construction contracts.
Enforceability of Waiver of Consequential Damages Clauses
Arkansas courts enforce contractual waivers of consequential damages in the construction context. See Erdman Co. v. Phoenix Land & Acquisition, LLC, No. 2:10-CV-2045, 2013 WL 3776405, at *1 (W.D. Ark. July 17, 2013) (granting defendant’s summary judgment motion and finding while applying Arkansas law that plaintiff owner’s claims for consequential damages arising out of the design-build contract barred by the contract’s mutual waiver of consequential damages); see also K.C. Props. of N.W. Arkansas, Inc. v. Lowell Inv. Partners, LLC, 280 S.W.3d 1, 10–11 (Ark. 2008) (analyzing nature of damages to determine whether they fit within contract’s waiver-of-consequential-damages provision).
Generally, Arkansas courts attempt to ascertain and give effect, where possible, to the mutual intention of the parties. See Johnson v. Jones, 807 S.W.2d 39, 41–42 (Ark. Ct. App. 1991) (“In determining whether a provision in a contract is for a penalty or for liquidated damages, generally, the intention of the parties will control.”); Lasater v. W. Clay Drainage Dist., 8 S.W.2d 502, 503 (Ark. 1928) (“The primary rule in the construction of contracts requires the court to ascertain and give effect, where possible, to the mutual intention of the parties.”).
However, contractual provisions limiting liability or damage for breach are not favored by Arkansas law. See W. William Graham, Inc. v. City of Cave City, 709 S.W.2d 94, 95–96 (Ark. 1996) (holding that limitation of liability clauses are not favored by courts, “will be strictly construed against the party” endeavoring to rely upon them, and shall “be limited to their exact language.”).
Moreover, under Arkansas law, in order “[t]o recover consequential damages on a contract, the plaintiff must prove the defendant knew at the time he entered the contract that his breach could cause the plaintiff to suffer special damages, and that the defendant ‘tacitly agreed’ to assume responsibility for those damages.” Washington Reg’l Med. Ctr. v. Raber, 2018 WL 5307624, at *4 (W.D. Ark. Oct. 26, 2018) (internal citation omitted); see also Reynolds Health Care Servs., Inc. v. HMNH, Inc., 217 S.W.3d 797, 804 (Ark. 2005) (“Parties may expressly agree to be responsible for consequential damages…. However, in the absence of such an express contract to pay such special damages, the facts and circumstances in proof must be such as to make it reasonable for the judge or jury trying the case to believe that the party at the time of the contract tacitly consented to be bound to more than ordinary damages in case of default on his part.” (internal citation omitted)); Morrow v. First Nat’l Bank of Hot Springs, 550 S.W.2d 429, 430 (Ark. 1977). However, if there is compelling evidence of a tacit agreement – that is, where a party is aware that the other party will seek consequential damages in case of default – the court will award those damages. See Bank of Am., N.A. v. C.D. Smith Motor Co., 106 S.W.3d 425, 433–34 (Ark. 2003) (finding sufficient evidence of a tacit agreement in order to impose liability for consequential damages).
In the context of transactions for the sale of goods, the Arkansas Uniform Commercial Code allows a buyer to recover consequential damages from the seller under appropriate circumstances. See Ark. Code Ann. §§ 4-2-711 – 4-2-714, 4-2-715. However, Arkansas code section 4-2-719 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 the contractually specified limited or exclusive remedy to fail of its essential purpose. See Caterpillar Tractor Co. v. Waterson, 679 S.W.2d 814, 820–21 (Ark. Ct. App. 1984) (“[A]n otherwise valid limitation of remedy contained in a contract is avoided by the buyer if the limitation fails of its essential purpose or is unconscionable.”). Section 4-2-719(3) further provides: “Limitation of consequential damages for injury to the person in the case of consumer goods is prima facie unconscionable but limitation of damages where the loss is commercial is not.”
Application of Economic Loss Doctrine
Arkansas courts have not recognized the economic loss doctrine in any context. See Erdman Co. v. Phoenix Land & Acquisition, LLC, No. 2:10-CV-2045, 2013 WL 685209, at *2 (W.D. Ark. Feb. 25, 2013); Bayer CropScience LP v. Schafer, 385 S.W.3d 822, 832–33 (Ark. 2011). The doctrine has been specifically rejected in products liability cases, while the Supreme Court of Arkansas has specifically declined to decide whether the doctrine applies to negligence claims. Bayer, 385 S.W.3d at 832–33. The federal district court in Arkansas interpreted two Arkansas cases to provide support for its rejection of the doctrine as applied to a negligence claim. Erdman, 2013 WL 685209, at *2 (citing Mine Creek Contractors, Inc. v. Grandstaff, 780 S.W.2d 543, 544 (Ark 1989) and Guerin Contractors, Inc. v. Reeves, 606 S.W.2d 143, 145 (Ark Ct. App. 1980)).
Enforceability of No Damages for Delay Clauses
No damages for delay clauses are generally enforceable in Arkansas. However, Arkansas courts give such clauses “restrained approval” and strict construction because of their harsh effect. Little Rock Wastewater Util. v. Larry Moyer Trucking, Inc., 902 S.W.2d 760, 765 (Ark. 1995).
Strict Interpretation of Contract
Arkansas courts strictly interpret contracts and hold that “the polestar of contractual construction is to determine and enforce the intent of the parties.” Taylor v. Hinkle, 200 S.W.3d 387, 395 (Ark. 2004) (citing Harris v. Stephens Production Co., 832 S.W.2d 837 (Ark. 1992)). If the agreement clearly and unambiguously expresses the parties’ intent, the court will adhere to the plain meaning of the language employed. Jorja Trading, Inc. v. Willis, 598 S.W.3d 1, 7 (Ark. 2020) (citing C. & A. Constr. Co., Inc. v. Benning Constr. Co., 509 S.W.2d 302, 303 (Ark. 1974)). Language is ambiguous if there is doubt or uncertainty as to its meaning and it is fairly susceptible to more than one equally reasonable interpretation. Crittenden Cty. v. Davis, 430 S.W.3d 172, 176–77 (Ark. Ct. App. 2013). In Arkansas, courts will not consider parol evidence to interpret contracts that are facially unambiguous. Jorga Trading, Inc., 598 S.W.3d at 7 (citing C. & A. Constr. Co., Inc. v. Benning Constr. Co., 509 S.W.2d at 303); see, e.g., Saltzman-Guenthner Clinic, Ltd. v. Burnett, 632 S.W.2d 441, 443 (Ark. Ct. App. 1982). However, if the written contract is ambiguous, Arkansas courts acknowledge that parol evidence may be admissible to explain the writing. Id. While ambiguities in a contract are strictly construed against the drafter of the contract, if there is ambiguity, Arkansas courts “will accord considerable weight to the construction the parties themselves give to it, evidenced by subsequent statements, acts, and conduct.” Sturgis v. Skokos, 977 S.W.2d 217, 222-23 (Ark. 1998).
Prompt Payment Requirements (Public/Private)
Arkansas Public – Ark. Code Ann. §§ 19-4-1403, 1411, 22-9-202-205 (2022) (allows 5 days (plus transmittal time) for the processing of a contractor’s pay request and failure to process in timeframe results in a penalty of 8% per annum; final payment to contractor within 90 days from final pay request and interest at 10% per annum after 90-day period; State Highway Commission and the Arkansas State Highway and Transportation Department are exempt).
Arkansas Private – N/A
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).
Arkansas – N/A
Licensing Requirements for Construction Managers
The Arkansas legislature has not enacted specific licensing requirements for all construction managers, but Arkansas law requires that any person who manages or supervises construction with a value of $50,000 or more must be licensed. Ark. Code Ann. § 17-25-101. The $50,000 threshold is calculated according to the value of the project, not the fee paid to the contractor. See Brimer v. Arkansas Contractors Licensing Bd., 849 S.W.2d 948, 951 (Ark. 1993). Arkansas courts have upheld the application of this requirement to construction managers. Gore Eng’g Associates, Inc. v. Arkansas Contractors Licensing Bd., 2013 Ark. App. 353 (2013). Importantly, contractors and construction managers in violation of the licensing statute are prohibited from bringing a contract action or suit in quantum meruit. Ark. Code Ann. § 17-25-103(d); Meyer v. CDI Contractors, LLC, 284 S.W.3d 530, 535 (Ark. Ct. App. 2008).