Enforceability of Limitation of Liability Clauses
Author: Saloni Shah and Joanna Kopcyzk
Limitation of Liability
Kentucky courts generally uphold limitation of liability clauses unless they are unconscionable. Carboline Co. v. Oxmoor Ctr., No. 84-CA-48-MR, 1985 WL 185466, 40 UCC Rep. Serv. 1728, 1733 (Apr. 5, 1985) (holding that in a sophisticated commercial setting, the parties’ agreement excluding liability for consequential damages was not unconscionable). Parties may also contractually modify or limit remedies and warranties in sales contracts. Ky. Rev. Stat. Ann. §§ 355.2-316, 355.2-719(1)-(3) (West 2022) (“Consequential damages may be limited or excluded unless the limitation or exclusion is unconscionable”).
Kentucky courts view exculpatory clauses with greater skepticism. See Meiman v. Rehab. Ctr., Inc., 444 S.W.2d 78, 80 (Ky. 1969) (rejecting exculpatory clause contained in patient’s contract with rehabilitation center because it was against public policy). The Court of Appeals of Kentucky has stated that an exculpatory agreement will not be upheld where either “(1) the interest of the public requires the performance of such duties, or (2) because the parties do not stand upon a foot of equality.” Id. To be enforceable, exculpatory agreements must be explicitly clear. See Hargis v. Baize, 168 S.W.3d 36, 47 (Ky. 2005) (stating that the clause must be “so clear and understandable that an ordinarily prudent and knowledgeable party to it will know what he or she is contracting away”); Grego v. Jenkins, 527 S.W.3d 50, 53-54 (Ky. Ct. App. 2017) (citing and discussing Hargis). Kentucky courts are more likely to enforce exculpatory clauses when they are “part of an arm’s-length transaction between sophisticated parties with equal bargaining power,” as long as the clause does not protect against willfulness and wantonness. Cumberland Valley Contractors, Inc. v. Bell Cty. Coal Corp., 238 S.W.3d 644, 653-54 (Ky. 2007); Sparks v. Fifth Third Mortg. Co., No. 5:17-450-KKC, 2018 WL 6424699, at *5 (E.D. Ky. Dec. 6, 2018). Kentucky courts are also more likely to uphold exculpatory clauses limiting liability for contract breach, Louisville Bear Safety Serv., Inc. v. S. Cent. Bell Tel. Co., 571 S.W.2d 438, 439-40 (Ky. Ct. App. 1978), than those that restrict recovery for tort cases or future personal injury, City of Hazard Mun. Hous. Comm’n v. Hinch, 411 S.W.2d 686, 688-89 (Ky. 1967).
Kentucky law voids indemnity clauses in certain construction contracts that purport to indemnify or hold harmless a contractor from that contractor’s own negligence. Ky. Rev. Stat. Ann. § 371.180 (West 2022); see also Pruitt v. Genie Indus. Inc., No. 3:10-81-DCR, 2013 WL 485966, at *10 (E.D. Ky. Feb. 6, 2013) (applying Section 371.180 to a contract relating to technical support services provided in connection with a construction project).
Enforceability of Waiver of Consequential Damages Clauses
Kentucky courts have not directly addressed the enforcement of waiver of consequential damages clauses in the construction context, but it appears that they may likely enforce such clauses because they have enforced contractual limitations of liability in other contexts. Generally, Kentucky courts hold that it is a fundamental rule of contract law that a written agreement – duly executed by the party to be held – shall be enforced absent fraud in the inducement. Mortg. Elec. Registration Sys., Inc. v. Abner, 260 S.W.3d 351, 354 (Ky. App. 2008) (citation omitted); see also Cline v. Allis-Chalmers Corp., 690 S.W.2d 764, 766 (Ky. App. 1985). Exculpatory clauses that limit liability will be enforced unless they are found to be unconscionable. Louisville Bear Safety Serv., Inc. v. South Central Bell Tel. Co., 571 S.W.2d 438, 440 (Ky. App. 1978). In South Central Bell Tel., the court held that the exculpatory clause in a yellow pages advertising contract, which limited the telephone company’s liability for errors in its advertising pages to the cost of the advertising, was enforceable. Id. at 440. The doctrine of unconscionability, however, has developed as an exception to the fundamental rule that a written agreement, absent fraud in the inducement, shall be enforced. Id.; see GGNSC Frankfort, LLC v. Tracy, 2015 WL 1481149, at *12 (E.D. Ky. Mar. 31, 2015) (citation omitted) (“The doctrine of unconscionability is a narrow exception to the general rule that ‘absent fraud in the inducement, a written agreement duly executed by the party to be held, who had an opportunity to read it, will be enforced according to its terms.’”). “[A]n unconscionable contract has been characterized as ‘one which no man in his senses, not under delusion, would make, on the one hand, and which no fair and honest man would accept, on the other.’” GGNSC Frankfort, LLC, 2015 WL 1481149, at *12 (citation omitted).
In the context of transactions for the sale of goods, the Kentucky Uniform Commercial Code allows a buyer to recover consequential damages from the seller under appropriate circumstances. See Ky. Rev. Stat. Ann. §§ 355.2-711 – 355.2-714, 355.2-715(2). However, Kentucky code section 355.2-719 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 Moore v. Mack Trucks, Inc., 40 S.W.3d 888, 892 (Ky. App. 2001) (holding that a “limited exclusive remedy fails of its essential purpose whenever the warrantor fails to correct the defect within a reasonable time after a defective part is discovered”); see also Consolidated Aluminum Corp. v. Krieger, 710 S.W.2d 869, 872–73 (Ky. Ct. App. 1986) (exclusion of seller’s liability for consequential damages, located in fine print on reverse side of acknowledgement of contract form under the signature line and purporting to incorporate by reference into the agreement, was invalid because under Kentucky law, “any part of a commercial writing appearing below the signature line does not become part of the contract”).
Application of Economic Loss Doctrine
Kentucky courts have only recently recognized the economic loss doctrine and have adopted a “pure contract” approach, explicitly rejecting a “calamitous event” or “destructive occurrence” exception to the economic loss rule. Giddings & Lewis, Inc. v. Industrial Risk Insurers, 348 S.W.3d 729, 738–41 (Ky. 2011). Accordingly, Kentucky law bars a tort claim for pure economic loss regardless of whether the damage arose from a destructive occurrence. Id. Under the holding in Giddings & Lewis, damage to the product itself, regardless of whether it was part of an integrated system, is the type of damage that is barred by the doctrine. Id. at 742–43.
Application of Rule Outside of Products Liability
The Giddings & Lewis court appears skeptical of the doctrine’s application to a services contract. Id. at 737-38. (“[Prior cases] never mentioned the economic loss rule, perhaps because the absence of a contract between the litigants, or the absence of a “product” or both of these facts, underscored its inapplicability.”); see also Louisville Gas & Elec. Co. v. Continental Field Systems, Inc., 420 F. Supp. 2d 764, 769 (W.D. Ky. 2005) (“As yet, no Kentucky court has specifically considered whether the economic loss rule should apply to the provision of services as well as the selling of a product.”) Nevertheless, the Kentucky Court of Appeals has applied the economic loss rule to a case involving construction services in an unpublished opinion dismissing a negligence complaint for failure to state a claim. Cincinnati Ins. Companies v. Staggs & Fisher Consulting Engineers, Inc., No. 2008-CA-002395-MR, 2013 WL 1003543, at *4 (Ky. Ct. App. Mar. 15, 2013). By contrast, a federal district court in Kentucky declined to extend the Giddings & Lewis economic loss rule to a construction services contract. See NS Transp. Brokerage Corp. v. Louisville Sealcoat Ventures, LLC, No. 3:12–CV–00766–JHM, 2015 WL 1020598, at *3-*4 (W.D. Ky. Mar. 9, 2015) (distinguishing Staggs & Fisher).
Kentucky courts have also carved out an exception to the economic loss rule for the tort of negligent misrepresentation where there is no contractual relationship between the parties. See D.W. Wilburn, Inc. v. K. Norman Berry Assocs., Architects, PLLC, No. 2015-CA-001254-MR, 2016 WL 7405774, at *7 (Ky. Ct. App. Dec. 22, 2016); Presnell Const. Managers, Inc. v. EH Const., LLC, 134 S.W.3d 575, 582 (Ky. 2004). The court in Wilburn explicitly found that this exception applied in the context of a claim against a contractor or architect. Id.
The Supreme Court of Kentucky expressly declined to decide in Giddings & Lewis whether the economic loss rule bars fraud claims. Giddings & Lewis, 348 S.W.3d at 733. Federal courts in Kentucky have grappled with this issue and are split on the question. See, e.g., McDorman v. D&G Props., No. 5:18-cv-36-TBR, 2019 WL 3367001, at *6–*7 (W.D. Ky. July 24, 2019) (citing cases and declining to apply economic loss rule to fraud claim).
Enforceability of No Damages for Delay Clauses
Kentucky courts generally recognize the validity of no damages for delay clauses despite the potential for harsh effects. R & R, Inc. v. Commonwealth, No. 2004-CA-00691-MR, 2005 WL 626391, at *3 (Ky. Ct. App. Mar. 18, 2005). See Apex Cont., Inc. v. City of Paris, No. 2002-CA-001310-MR, 2004 WL 758276, at *2 (Ky. Ct. App. Apr. 9, 2004). However, the Court of Appeals of Kentucky has recognized an exception to the enforcement of no damages for delay clauses when the government actively interferes with the contractor’s work. Humphreys v. J.B. Michael & Co., 341 S.W.2d 229, 234-35 (Ky. Ct. App. 1960) (nonetheless declining to apply the active interference exception to the factual circumstances), overruled on other grounds Foley Constr. Co. v. Ward, 375 S.W.2d 392 (Ky. Ct. App. 1963).
Strict Interpretation of Contract
Kentucky courts strictly interpret contracts and in the absence of ambiguity, Kentucky courts will strictly enforce a contract’s terms. Frear v. P.T.A. Industries, Inc., 103 S.W.3d 99, 106 (Ky. 2003). The primary objective in interpreting a contract is to effectuate the intentions of the parties. 3D Enters. Contracting Corp. v. Louisville & Jefferson Cnty. Metro. Sewer Dist., 174 S.W.3d 440, 448 (Ky. 2005); see also Maze v. Bd. of Directors for Commonwealth Postsecondary Educ. Prepaid Tuition Tr. Fund, 559 S.W.3d 354, 363 (Ky. 2018). “When no ambiguity exists in the contract, a court looks only as far as the four corners of the document to determine the parties’ intentions.” Id. “The fact that one party may have intended different results . . . is insufficient to construe a contract at variance with its plain and unambiguous terms.” Mostert v. Mostert Group, LLC, 606 S.W.3d 87, 91 (Ky. 2020)(quoting Abney v. Nationwide Mut. Ins. Co., 215 S.W.3d 699, 703 (Ky. 2006)). “A contract is ambiguous if a reasonable person would find it susceptible to different or inconsistent interpretations.” Kentucky Shakespeare Festival, Inc. v. Dunaway, 490 S.W.3d 691, 694-95 (Ky. 2016). If ambiguity exists, Kentucky courts will look to and consider extrinsic evidence as to the parties’ intentions. Frear, 103 S.W.3d at 106. It has long been settled in the Commonwealth of Kentucky that courts generally follow the rule of contra proferentem and construe ambiguities in a contract against the drafter of said contract. Maze, 559 S.W. 3d at 367 (citing Majestic Oaks Homeowners Association, Inc. v. Majestic Oaks Farms, Inc., 530 S.W.3d 435, 441 (Ky. 2017)). However, Kentucky courts are to still give the contract a reasonable interpretation and there is no absolute requirement that every doubt be resolved against the draft. Stone v. Kentucky Farm Bureau Mut. Ins. Co., 34 S.W.3d 809, 810-11 (Ky. Ct. App. 2000).
Prompt Payment Requirements (Public/Private)
Kentucky Public – Ky. Rev. Stat. Ann. §§ 371.400 to .425 (West 2022) (owner to prime 30 business days after invoice for progress payments and 30 business days after substantial completion; prime to give notice of nonpayment after 25 business days; prime to sub 15 business days after payment; interest at 12% per annum).
Kentucky Private – Ky. Rev. Stat. Ann. §§ 371.400 to .425 (West 2022) (owner to prime 30 business days after invoice for progress payments and 30 business days after substantial completion; prime to give notice of nonpayment after 25 business days; prime to sub 15 business days after payment; interest at 12% per annum).
False Claims Statute
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).
Kentucky – N/A
Licensing Requirements for Construction Managers
Although Kentucky does not require licensing of general contractors or construction managers, contracting specialties such as electrical, HVAC, fire sprinkler, plumbing, elevator, and asbestos abatement contractors are regulated and require licensing. Construction managers and contractors may still be subject to licensing requirements at the local level. Local licensing requirements vary by municipality.