Enforceability of Limitation of Liability Clauses
Author: Saloni Shah and Joanna Kopcyzk
Limitations of Liability
Delaware courts uphold contractual limitations of liability in service contracts. See Donegal Mut. Ins. Co. v. Tri-Plex Sec. Alarm Sys., 622 A.2d 1086, 1089-90 (Del. Super. Ct. 1992) (upholding limitation of liability clause in alarm service contract); D’Aguiar v. Heisler, No. CIV.A. CPU4-09005285, 2011 WL 6951847, at *13 (Del. Com. Pl. Dec. 15, 2011) (upholding limitation of liability clause in home inspection contract).
Delaware courts also enforce a reasonable clause limiting liability in a sales contract, provided it serves its essential purpose and is not unconscionable. Del. Code Ann. tit. 6, § 2-719(1)-(3) (West 2021-2022). Limitations of liability are unenforceable where the circumstances involve fraud, J.A. Jones Constr. Co. v. City of Dover, 372 A.2d 540, 545 (Del. Super. Ct. 1977), but may apply even in the face of a bad faith or willful breach of contract. Petroleum v. Magellan Terminals Holdings, L.P., No. N12C-02-302, 2015 WL 3885947, at *24 (Del. Super. Ct. June 23, 2015).
Delaware courts permit exculpatory clauses where it is clear that their “terms were intended by other parties to apply to the particular conduct of the defendant which has caused the harm.” Slowe v. Pike Creek Court Club, Inc., No. 08C-08-029, 2008 WL 5115035, at *4 (Del. Super Ct. 2008). Parties are not required to “itemize every conceivable injury or loss intended to fall within [the clause’s] ambit,” but the clause should still clearly articulate the risks the parties intend to cover. Id. Although an exculpatory clause releasing prospective negligence must be “crystal clear and unequivocal,” this same rule does not apply to a general release. Riverbend Cmty., LLC v. Green Stone Eng’g, LLC, 55 A.3d 330, 336 (Del. 2012).
Del. Code Ann. tit. 6, § 2704 (West 2021-2022) invalidates any construction agreement (both private and state) purporting to indemnify or hold harmless the promisee or indemnitee or others for damages arising from liability for bodily injury, death, or property damages caused partially or solely from the promisee’s negligence. This section applies even when the indemnity provision is “crystal clear and unambiguous in obligating the promisor or indemnitor to indemnify or hold harmless the promisee or indemnitee from liability.” Id. It also applies to all phases of preconstruction, construction, repairs, and maintenance, as well as to designers, planners and architects. Id.; see also Kempski v. Toll Bros., Inc., 582 F. Supp. 2d 636, 643-44 (D. Del. 2008) (nullifying indemnification provision in construction construction).
Enforceability of Waiver of Consequential Damages Clauses
At least one Delaware court in an unpublished opinion has directly addressed the enforcement of waiver of consequential damages clauses in the construction context. In Smyrna Hospitality, LLC v. Petrucon Const., Inc., 2013 WL 6039287 (Del. Super. Ct. 2013) (unpublished), the court discussed the parties’ mutual waiver of consequential damages clause (Article 4.3.10 of the AIA A201-1997) and held that the contract clearly waived consequential damages. The Smyrna Court relied on general contract interpretation concepts to determine that the contract was susceptible to one meaning, namely, that the defendant was responsible for the costs of repair under the agreement, but not consequential damages, as defined by the agreement. Id. at *3–4. See also Delmarva Power & Light Co. v. ABB Power T&D Co., Inc., 2002 WL 840564, at *4 (Del. Super. Ct. 2002) (unpublished) (recognizing in a matter involving the interpretation of Del. Code Ann. tit. 6, § 2-719 that a “contractual provision excluding consequential damages is enforceable” and further explaining that “under Delaware law, a party may limit the remedies available to the other party, provided the remedy excluding consequential damages, does not fail of its essential purpose, and is not unconscionable”).
In the context of transactions for the sale of goods, the Delaware Uniform Commercial Code allows a buyer to recover consequential damages from the seller under appropriate circumstances. See Del. Code Ann. tit. 6, §§ 2-711 – 2-714, 2-715(2). However, Delaware code section 2-719 of title 6 permits the buyer and the seller to contract to limit or exclude consequential damages unless the contractually specified limitation or exclusion is unconscionable or where the circumstances cause the contractually specified limited or exclusive remedy to fail of its essential purpose. See, e.g., J.A. Jones v. City of Dover, 372 A.2d 540, 549 (Del. Super. Ct. 1977) (applying limitation of liability provisions from UCC § 2-719).
Application of Economic Loss Doctrine
Delaware recognizes the economic loss doctrine as a defense in both products liability and construction cases. As in other states, however, Delaware has also established a number of statutory and common law exceptions to the rule.
In the products liability context, the Delaware Supreme Court has defined the defense as “a judicially created doctrine that prohibits recovery in tort where a product has damaged only itself (i.e., has not caused personal injury or damage to other property) and, the only losses suffered are economic in nature.” Danforth v. Acorn Structures, Inc., 608 A.2d 1194, 1195 (Del. 1992) (barring recovery of purely economic damages by buyer of “Custom” architectural design and related building package materials for a home against seller after design proved faulty, causing ventilation issues in home); see also Delmarva Power & Light v. Meter-Treater, Inc., 218 F. Supp. 2d 564, 568 (D. Del. 2002) (quoting Danforth and barring claims by electric utility against manufacturer of allegedly defective electrical surge protectors); Christiana Marine Serv. Corp. v. Texaco Fuel & Marine Mktg., Inc., No. Civ.A. 98C-02-217WWC, 2002 WL 1335360, at *5 (Del. Sup. Ct. June 13, 2002) (quotation omitted) (“The economic loss doctrine prohibits recovery in tort for losses unaccompanied by a bodily harm or a property damage.”). The Christiana Marine court has interpreted Delaware’s economic loss rule to “forbid[ ] plaintiffs from recovering in tort for losses suffered that are solely economic in nature” and further noted that “[e]conomic loss is any monetary loss[ ], costs of repair or replacement, loss of employment, loss of business or employment opportunities, loss of good will, and diminution in value.” Id. (quotation omitted).
Delaware has not restricted application of its economic loss rule to commercial parties, and applies it equally in cases involving both commercial parties and consumer transactions. See Danforth, 608 A.2d at 1200 (“[W]e are unable to … recognize an exception to the economic loss doctrine by allowing individual consumers, as distinguished from commercial buyers, to recover for economic loss … .”).
Delaware’s economic loss rule is not restricted to products liability cases. In the construction context, Delaware courts have also recognized the economic loss doctrine as a bar to claims for negligence. See J.W. Walker & Sons, Inc. v. Constr. Mgmt. Serv., Inc., No. 7C-09-034 MMJ, 2008 WL 1891385, at *1 (Del. Super. Ct. Feb. 28, 2008) (dismissing negligence count in subcontractor breach of contract claim and declining to “extend tort law into areas adequately addressed by contract law.”); Int’l Fid. Ins. Co. v. Mattes Elec., Inc., No. Civ.A. 99C-10-065WCC, 2002 WL 1400217, at *1 (Del. Super. Ct. June 27, 2002) (barring surety’s negligence claim against a contractor despite lack of contractual relationship, rejecting surety’s argument that “doctrine is not applicable to … exceptions of negligent misrepresentation or professional malpractice”).
The Home Owner’s Protection Act Exception
Delaware’s Home Owner’s Protection Act provides a residential construction exception to the economic loss rule whereby a claim may be made based upon “negligence in the construction or manner of construction of an improvement to residential real property and/or in the designing, planning, supervision and/or observation of any such construction or manner of construction.” Del. Code Ann. tit. 6, §§ 3651–52. The Home Owner’s Protection Act supersedes prior case law to the extent that it applies to residential construction cases. See Marcucilli v. Boardwalk Builders, Inc., No. CIV. A. 99C-02-007, 1999 WL 1568612, at *4 (Del. Super. Dec. 22, 1999) (stating that the Act superseded the holding in Danforth and holding that “[u]pon the adoption of the Home Owner’s Protection Act, the economic loss doctrine no longer applies to preclude negligence actions in cases involving the construction of residential dwellings.”); see also Casale Constr., LLC v. Best Stucco LLC, No. CV N13C-03-285 MJB, 2014 WL 1316150, at *3 (Del. Super. Ct. Mar. 28, 2014) (applying Act to materials supplier and installer).
Negligent Misrepresentation Exception
Delaware’s lower courts have also recognized a negligent misrepresentation exception to the economic loss doctrine. For example, some Delaware courts have adopted the exception from Restatement (Second) of Torts § 552, applicable where a defendant, in the business of supplying information, has negligently supplied information to the complainant. See Guardian Constr. Co. v. Tetra Tech Richardson, Inc., 583 A.2d 1378, 1386 (Del. Sup. Ct. 1990) (allowing negligence and negligent misrepresentation claims by general contractor and subcontractor for pure economic damages against design engineer who prepared defective plans and specifications, despite lack of contractual privity). In Delaware, however, application of this exception is narrow and requires the plaintiff to prove two elements: that “defendant supplied the information to the plaintiff for use in business transactions with third parties” and that “the defendant is in the business of supplying information.” Christiana Marine Serv. Corp., 2002 WL 1335360, at *6 (citations omitted). In applying these elements, “a case-specific inquiry must be made, looking to the nature of the information and its relationship to the kind of business conducted. When information is the ‘end and aim’ product of a defendant’s work, Delaware courts have found the potential for liability.” Del. Art Museum v. Ann Beha Architects, Inc., No. 06-481GMS, 2007 WL 2601472, at *2 (D. Del. Sept. 11, 2007) (quotations omitted) (dismissing tort claim where engineer did not act as “pure information provider”).
Intentional Torts Exception
Delaware courts also recognize an exception for certain intentional torts, including claims for tortious interference with contract, trade secret misappropriation and fraudulent inducement. Commonwealth Constr. Co. v. Endecon, Inc., No. 08C-01-266 RRC, 2009 WL 609426, at *4-5 (Del. Sup. Ct. Mar. 9, 2009) (allowing for a tortious interference claim because lack of contractual privity between contractor and architect/engineer in a church renovation project meant contractor could not sue engineer for breach); Brasby v. Morris, No. C.A. 05C-10-022-RFS, 2007 WL 949485, at *7 (Del. Super. Ct. Mar. 29, 2007) (rejecting application of economic loss rule to fraudulent misrepresentation claim). However, the fraudulent inducement exception does not apply where “the fraud claim relates to the performance under the contract, as opposed to inducement of the contractual relationship.” Richie v. Hillstone Env. Partners, LLC, No. 19-649-RGA-SRF, 2019 WL 2995178, at *4 (D. Del. July 9, 2019).
Tort Liability for Professionals Regardless of Contractual Relationship
The Danforth decision declined to address the relationship of Delaware’s economic loss rule to professional malpractice tort claims. See Danforth, 608 A.2d at 1201 n.5. A lower court in Delaware has stated that to overcome the bar against purely economic loss, a professional relationship must exist between the parties with an intent to benefit the client that would trigger an independent professional obligation and duty. Int’l Fidelity Ins. Co., 2002 WL 1400217, at *2.
Enforceability of No Damages for Delay Clauses
No damages for delay clauses are “given effect if plainly applicable, but otherwise they are strictly construed to avoid harsh results.” Wilson Cont. Co. v. Justice, No. 508 CIV.A.1974, 1981 WL 377680, at *1 (Del. Super. Ct. Jan. 22, 1981); see also City of Dover v. J. A. Jones Constr. Co., 377 A.2d 1, 2 (Del. 1977) (stating that defendant could potentially “prevail on the basis of the ‘no damage’ or ‘no extra compensation’ provisions of the contract.”). However, such clauses do not protect a party from “liability for its own unfair dealing” or fault, and where, for example, the State misled a contractor into entering into a contract by “concealing the impossibility of meeting the contract completion date, it [was] liable for the resulting damages for the delay from the contract completion date to the actual completion date,” despite the inclusion of a “no damage” clause in the contract. Wilson Cont. Co. v. Justice, No. 508 CIV.A.1974, 1981 WL 377680, at *2 (Del. Super. Ct. Jan. 22, 1981); see also J. A. Jones Constr. Co. v. City of Dover, 372 A.2d 540, 546 (Del. Super. Ct. 1977) (“The principle has long been established in this State that contractual provisions which purport to relieve a party from liability for matters resulting from its own fault are not favored.”).
Strict Interpretation of Contract
In Delaware, courts will give priority to the parties’ intentions as reflected in the four corners of the agreement. GMG Capital Investments, LLC v. Athenian Venture Partners I, L.P., 36 A.3d 776, 779 (Del. 2012); see also Murfey v. WHC Ventures, LLC, 236 A.3d 337, 350 (Del. 2020) (quoting GMG Capital Investments, 36 A.3d at 779). In upholding the intentions of the parties, a court must construe the agreement as a whole, giving effect to all provisions therein. Id. Delaware courts will not read a contract so as to render any of the terms thereof either meaningless or illusory. Osborn ex rel. Osborn v. Kemp, 991 A.2d 1153, 1159 (Del. 2010) (citing Sonitrol Holding Co. v. Marceau Investissements, 607 A.2d 1177, 1183 (Del. 1992)). If the agreement is clear and unambiguous, the terms will be interpreted according to their ordinary meaning. GMG Capital Investments, 36 A.3d at 780. The contract terms themselves will be controlling when they establish the parties’ common meaning so that a reasonable person in the position of either party would have no expectations inconsistent with the contract language. Id. A contract is not rendered ambiguous simply because the parties do not agree upon its proper construction. Id. Rather, an ambiguity exists when the provisions in controversy are fairly susceptible of different interpretations or may have two or more different meanings. Id. If the contract is deemed ambiguous, the interpreting court must look beyond the language of the contract to ascertain the parties’ intentions. Id. Further, should the contract be deemed ambiguous, Delaware courts will also “apply the doctrine of contra proferentem against the drafting party and interpret the contract in favor of the non-drafting party.” Osborn, 991 A.2d at 1160. However, it is only when an ambiguity exists that a Delaware court will resort to extrinsic evidence to discern the parties’ intent in interpreting the contract. Town of Cheswold v. Central Delaware Business Park, 188 A.3d 810, 820 (Del. 2018).
Prompt Payment Requirements (Public/Private)
Delaware Public – Del. Code Ann. tit. 29, § 6516(f) (2022) (owner to prime 21 days after invoice certified by agency agent (certification required within 7 days from receipt of invoice) or 10 days after required federal agency’s approval; final payment and retainage 60 days after completion or notice of completion or 30 days after required federal agency’s final approval; prime to sub 21 days after payment unless otherwise agreed; interest not to exceed 2% above prime interest rate; payments withheld on reasonable grounds do not bear interest).
Delaware Private – Del. Code Ann. tit. 6, §§ 3501–3509 (2022) (mandatory payment clauses in construction contracts (owner to prime 30 days after end of billing period, prime to sub 30 days after receipt from owner); otherwise, where no contractually-prescribed payment terms, owner to prime 30 days after invoice or “end of billing period,” whichever is later, and prime to sub 15 days after payment; interest at legal rate in effect at time of obligation; notice of a disputed invoice must be provided in writing within 7 days of receipt or else deemed accepted, unless otherwise specified by contract or other exception applies).
False Claims Statute
Del. Code Ann. tit. 6, §§ 1201-1211 – The Delaware False Claims and Reporting Act mirrors the language of the FCA. Differences include a civil penalty range of $10,957 to $21,916 for each violation and a broader definition of “Government” that includes the state, political subdivisions, state and municipal authorities, and entities or persons using state funds. Id. §§ 1201-02. Similar to the FCA, Delaware’s Act reduces the violator’s liability to not less than two times the amount of damage that the government sustained if a violator: (1) provides all the information known about that violation to the governmental investigators within 30 days of gaining that knowledge; (2) fully cooperates with the governmental investigators; and (3) provides the information without actual knowledge of the investigation and before the commencement of criminal prosecution, civil action, investigation, or administrative action. Id. § 1201(b).
Licensing Requirements for Construction Managers
Construction managers are included within the broadly worded statutory definition of contractors under Delaware law, and therefore are required to comply with the same licensing requirements. Del. Code Ann. tit. 30, § 2501. Delaware regulations further require construction managers to make disclosures to the Delaware Department of Finance within ten (10) days of entering into a contract with a contractor or subcontractor that is not a resident of Delaware. Id. § 2503.