Enforceability of Limitation of Liability Clauses
Author: Saloni Shah and Joanna Kopcyzk
Limitation of Liability
Louisiana courts recognize limitations of liability. See Lazybug Shops, Inc. v. Am. Dist. Tel. Co., 374 So. 2d 183, 186 (La. Ct. App. 1979) (upholding a limitation of liability in a contract between an operator of a retail clothing store and burglar alarm company because it was “clear and specific and will not lead to an absurd result”); Bryan J. Guillot, Inc. v. Convention Sec. Servs., Inc., 720 So. 2d 743, 744-46 (La. Ct. App. 1998) (enforcing limitation of liability clause in convention center’s security contract that encompassed any negligence by security company in failing to prevent removal of exhibitor’s equipment from convention hall). Louisiana courts, however, will not enforce limitations of liability “where the breaching party’s conduct amounted to ‘a deliberate disregard of a contractual duty.’” SeaTrepid Int’l, LLC v. MK Salvage Venture, LLC, No. 13-51, 2013 WL 4012655, at *2 (E.D. La. Aug. 5, 2013). Similarly, La. Civ. Code Ann. art. 2004 (West 2021) voids any contract clause that excludes or limits the liability of one party for intentional or gross fault that causes damage or physical injury to the other party. The purpose of this statute is to “express the principle that it is against public policy to permit a party to obtain a license for commission of future bad acts.” Savoie v. Pa. Gen. Ins. Co., 2017 WL 4574197, at *6 (E.D. La. Oct. 13, 2017). Further, this statute applies “to prohibit settlements for injuries arising out of future tortious conduct, but does not prohibit settlement of past and future damages arising out of tortious conduct that has already occurred.” Dempster v. Lamorak Ins. Co., CV 20-95, 2020 WL 5077244, at *15 (E.D. La. Aug. 26, 2020).
Louisiana has limited the enforceability of exculpatory clauses. A party to a contract may not (1) limit or exclude its liability for intentional or gross fault that causes damage to the other party, or (2) limit or exclude liability of one party for causing physical injury to the other party. La. Civ. Code Ann. art. 2004 (2021). This statute, however, does not apply to a stipulated damages clause that provides the amount to be recovered in the event a contract is breached. 1100 S. Jefferson Davis Parkway v. Williams, 165 So. 3d 1211, 1219 n.9 (La. Ct. Ap. 2015). Despite limiting exculpatory clauses, Louisiana courts have made clear that “[a]ll exculpatory clauses are not ipso facto null and void; parties are free to make their own contracts except in instances and under conditions inhibited by law, morals, or public policy.” Rosenblath’s, Inc. v. Baker Indus., 634 So. 2d 969, 974 (La. Ct. App. 1994). Exculpatory clauses must also be clear. Banner Chevrolet v. Wells Fargo Guard Servs., 508 So. 2d 966, 967 (La. Ct. App. 1987) (stating that a party may legally contract with another party to exclude liability for his negligence if the exculpatory agreement clearly expresses that intent).
Rather than striking an entire exculpatory provision, a court may elect only to strike the portion violating Article 2004. In Wadick v. Gen. Heating & Air Conditioning, LLC, 145 So. 3d 586 (La. Ct. App. 2014), the Court of Appeals of Louisiana struck a portion of an exculpatory clause in a contract between homeowners and an HVAC system company excluding liability for physical injuries or property damage arising out of a bad faith breach of contract in violation of Article 2004. Id. at 598-600. The court, however, enforced the portion of the clause that precluded claims for property damages as a result of a good faith breach of contract. Id.
Exculpatory clauses may relieve a party from liability for delay damages. Freeman v. Dep’t of Highways, 217 So. 2d 166, 175-76 (La. 1968) (upholding exculpatory provision precluding damages for delay in contract requiring engineering firm to perform services in connection with construction for Department of Highways). A contractual provision exempting an engineer from liability to a contractor for decisions made under the engineer’s authority as set forth in the contract documents did not preclude the engineer’s liability for preparing plans and specifications prior to the time that the contractor entered into the contract with the owner. Farrell Constr. Co. v. Jefferson Parish, 693 F. Supp. 490, 494 (E.D. La. 1988). However, the court found that the exculpatory clause covered all acts or omissions which took place during construction. Id.
La. Rev. Stat. Ann. § 9:2780.1(B) (West 2021) voids provisions in certain construction contracts that purport to indemnify the indemnitee from or against any liability for loss or damage resulting from the negligence or intentional acts or omissions of the indemnitee. Section 2780.1, however, does not invalidate indemnity obligations where the indemnifying party is required to indemnify another party for injuries resulting from the negligence of the indemnifying party or its subcontractors over which it has control. Rubin v. Brookshire Grocery, No. 13-1611, 2014 WL 949843, at *5 (W.D. La. Mar. 10, 2014).
La. Rev. Stat. Ann. § 38:2216 (West 2021) invalidates provisions in public contracts providing for a hold harmless or indemnity agreement from the contractor to the public or from the contractor to any architect or engineer. See Johnson v. Hamp’s Constr., LLC, 221 So. 3d 222, 229 (La. Ct. App. 2017), writ denied, 228 So. 3d 1229 (La. 2017) (partially voiding indemnity clause in public contract only to the extent it required indemnification against school board’s own negligence but upholding requirement of indemnification of non-negligent board’s cost of defense).
Enforceability of Waiver of Consequential Damages Clauses
Louisiana courts have not directly addressed the enforcement of waiver of consequential damages clauses in the construction context, but have enforced such clauses in other contexts. But see Team Contractors, L.L.C. v. Waypoint NOLA, L.L.C., No. CV 16-1131, 2017 WL 4366855, at *4 (E.D. La. Sept. 29, 2017) (denying owner’s motion to enforce waiver of consequential damages clause against architect because clause was ambiguous); see also Olympia Minerals, LLC v. HS Resources, Inc., 2013-2673, 2013-2717, p. 35–44 (La. 10/15/14); 171 So.3d 878, 900–05 (finding a waiver of consequential damages provision in a seismic contract to be enforceable).
Generally, Louisiana courts recognize that “it is well-settled that parties have freedom to contract for any object that is lawful, possible, and determined or determinable.” S. E. Auto Dealers Rental Ass’n, Inc. v. EZ Rent To Own, Inc., 2007-0599 (La. App. 4 Cir. 2/27/08), 980 So. 2d 89, 97, writ denied, 008-0684 (La. 4/18/08), 978 So. 2d 355 (citing La. C.C. art. 1971 among other authority). “This freedom of contract ‘signifies that parties to an agreement have the right and power to construct their own bargains.’” Id. (citation omitted). Moreover, “[t]he only exceptions to this rule are where the government or the state has restricted the parties’ right to contract because the proposed bargain has a deleterious effect on the public or otherwise violates public policy.” Id. (citations omitted).
Louisiana has not adopted Article 2 (“Sales”) of the Uniform Commercial Code. See La. Stat. Ann. § 10:1-101 et seq. Consequentially, the uniform provisions regarding the recovery and waiver of consequential damages found in the Uniform Commercial Code do not apply in Louisiana. But see La. Civ. Code Ann. art. 2438 et seq.
Application of Economic Loss Doctrine
Louisiana courts do not recognize the economic loss doctrine. In re Chinese Manufactured Drywall Products Liab. Litig., 680 F. Supp. 2d 780, 796 (E.D. La. 2010) (“Louisiana does not recognize the [economic loss rule], nor does it recognize a doctrine sufficiently similar to enable the Court to conduct an [economic loss rule] analysis for Plaintiffs’ tort claims under Louisiana law.”). As a result, “tort damages for economic losses may be recoverable by [parties] under laws unique to Louisiana.” Id.
Instead of the economic loss rule, Louisiana law applies a “duty-risk analysis” to tort claims. See Cedarholley Investment, LLC v. Pitre, 209 So. 3d 850, 853 (La. Ct. App. 2016) (“[T]he prohibitory economic-loss rule advanced by the defendants is not the law of this state. Louisiana law requires that the viability of the plaintiffs’ claims be determined after conducting a duty/risk analysis.”). This analysis allows recovery for economic losses caused by a tortfeasor absent contractual privity where there is: (1) proof that the defendant’s substandard conduct was a cause in fact of the plaintiff’s injuries; (2) proof that the defendant’s conduct failed to conform to the appropriate standard; (3) proof that the defendant had a duty to conform his conduct to a specific standard; (4) proof that the defendant’s substandard conduct was a legal cause of the plaintiff’s injuries (the scope of liability or scope of duty element); and (5) proof of actual damages. Perkins v. Entergy Corp., 782 So. 2d 606, 611 (La. 2001); cf. Barrie v. V.P. Exterminators, Inc., 625 So. 2d 1007, 1014 (La. 1993) (“Louisiana is a jurisdiction which allows recovery in tort for purely economic loss caused by negligent misrepresentation where privity of contract is absent.”). There is no specific rule for determining the scope of the duty, however, there must be an “ease of association between the rule of conduct, the risk of injury and the loss sought to be recovered.” PPG Indus., Inc. v. Bean Dredging, 447 So. 2d 1058, 1061 (La. 1984) (holding damages to economic interest of purchaser of natural gas, caused by a dredging contractor’s negligent injury to property preventing the owner’s performance of the contract did not fall within the scope of the protection intended by the law’s imposition of a duty on dredging contractors not to damage pipelines negligently).
That said, although Louisiana law does allow recovery for economic losses, such recovery is rare and claims are often rejected. See, e.g., Peterson v. W. World Ins. Co., 491 So. 2d 78, 79-80 (La. Ct. App. 1986) (rejecting a closely held corporation’s claim for loss of profits arising from injuries suffered by its president while performing maintenance on a water tower owned by defendant, because it was not within scope of duty); Dempster v. Louis Eymard Towing Co., 503 So. 2d 99, 100-01 (La. Ct. App. 1987), writ denied, 505 So. 2d 1136 (La. 1987) (rejecting claim of commercial fishermen for economic damages for loss of their fishing site from the owners of barges that had collided and fouled the site with debris, because fisherman did not have “proprietary interest”); Prof’l Answering Serv., Inc. v. Cent. La. Elec. Co., 521 So. 2d 549, 550 (La. Ct. App. 1988) (holding that company which damaged electrical lines did not owe duty to customers who suffered economic losses or property damage as a result because Louisiana has “no cause of action for negligent interference with contractual relations resulting in physical damage and economic loss.”); but see Cleco Corp. v. Johnson, 795 So. 2d 302, 306–07 (La. 2001) (distinguishing Professional Answering Service and holding that Louisiana law “extends a remedy” to customers who sustained direct property damage as a result of an automobile accident that caused a voltage surge in electrical lines).
Enforceability of No Damages for Delay Clauses
The Louisiana Public Works Act prohibits no damages for delay clauses in public construction contracts when the delay is caused by the government. “Any provision contained in a public contract which purports to waive, release, or extinguish the rights of a contractor to recover cost of damages . . . for delays in performing such contract, if such delay is caused in whole, or in part, by acts or omissions within the control of the contracting public entity . . . is against public policy and is void or unenforceable.” La. Rev. Stat. Ann. § 38:2216(H).
With regard to private contracts, although La. Civ. Code Ann. Art. 2004 nullifies any contractual clause that, “in advance, excludes or limits the liability of one party for intentional or gross fault that causes damage to the other party,” under this article, “a clause relieving a party for damage caused by delay is valid.” La. Civ. Code Ann. art. 2004, Official Revision Comments (c). See also Pellerin Constr., Inc. v. Witco Corp., 169 F. Supp. 2d 568, 585 (E.D. La. 2001) (no damages for delay clauses are “enforceable in the absence of evidence of intentional or gross fault.”).
Strict Interpretation of Contract
Louisiana courts strictly interpret contracts. “‘The rule of strict construction does not authorize a perversion of language or the exercise of inventive powers for the purpose of creating an ambiguity where none exists, nor does it authorize the court to make a new contract for the parties or disregard the evidence as expressed, or to refine away terms of a contract expressed with sufficient clearness to convey the plain meaning of the parties.’” Reg’l Urology, L.L.C. v. Price, 966 So.2d 1087, 1095 (La. Ct. App. 2007) (quoting Commercial Union Ins. Co. v. Advance Coating Co., 351 So.2d 1183, 1185 (La. 1977)). Stated otherwise, when the words of a “contract are clear and explicit and lead to no absurd consequences, no further interpretation may be made in search of the parties’ intent and courts must enforce the contract as written,” and Louisiana courts lack the authority to alter any terms of a contract if the provisions are unambiguous. Sims v. Mulhearn Funeral Home, Inc., 956 So.2d 583, 589 (La. 2007). Thus, Louisiana courts will follow the four-corner rule in that when a contract can be construed from within the four corners of the agreement, a court will not look to extrinsic evidence to interpret the terms therein. Id. In interpreting a contract however, each provision in a contract must be interpreted in light of the other provisions so that each is given the meaning suggested by the contract as a whole, and a doubtful provision must be interested in light of the nature of the contract, equity, usages, the conduct of the parties before and after the formation of the contract, and of other contracts of a like nature between the same parties. See La. Civ.Code Arts. 2050 and 2053. Thus, while parol or extrinsic evidence is generally inadmissible if a contract is unambiguous, such evidence may be used if the contract is ambiguous. Campbell v. Melton, 817 So.2d 69, 75 (La. 2002). “A contract is considered ambiguous on the issue of intent when either it lacks a provision bearing on that issue, the terms of a written contract are susceptible to more than one interpretation, there is uncertainty or ambiguity as to its provisions, or the intent of the parties cannot be ascertained from the language employed.” Id. Louisiana courts generally hold that interpretation of a contract’s ambiguous terms “requires construction against the contract’s drafter.” Id.; see also La. Civ. Code Art. 2056.
Prompt Payment Requirements (Public/Private)
Louisiana Public – La. Stat. Ann. § 38:2191 (2022) (owner to prime per contract, but not to exceed 45 days following receipt of certified request for payment without reasonable cause or else liable for reasonable attorneys’ fees and interest charged at 0.5% daily, not to exceed 15% final payments 45 days after clear lien certificate; any public entity failing to make any progressive stage payments arbitrarily or without reasonable cause, or any final payment when due as provided in this Section, shall be subject to mandamus to compel the payment of the sums due under the contract up to the amount of the appropriation made for the award and execution of the contract); La. Stat. Ann. § 9:2784 (2022) (prime to sub/sub to lower tier within 14 days after payment; where only portion of payment received from owner, prime to disperse on a prorated basis based on amount due on the payment; within 14 days after payment; prime and subs must pay a penalty of 0.5% of amount due per day, not to exceed 15% of outstanding balance due, for late payments; contractor or subcontractor liable for reasonable attorneys’ fees for the collection of payments due; however, claims for payment that are found to be meritless will subject the claimant to reasonable costs and attorney’s fees for the defense of such claim).
Louisiana Private – La. Stat. Ann. § 9:2784 (2022) (prime to sub/sub to lower tier within 14 days after payment; where only portion of payment received from owner, prime to disperse on a prorated basis based on amount due on the payment; prime and subs must pay a penalty of 0.5% of amount due per day, not to exceed 15% of outstanding balance due, for late payments; contractor or subcontractor liable for reasonable attorneys’ fees for the collection of payments due; however, claims for payment that are found to be meritless will subject the claimant to reasonable costs and attorneys’ fees for the defense of such claim).
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).
Licensing Requirements for Construction Managers
Louisiana statutes require contractors who “construct, supervise, superintend, oversee, direct, or in any manner assume charge” of a construction undertaking hold a license granted by the Louisiana State Licensing Board for Contractors. See La. Rev. Stat. Ann. §§ 37:2150.1 to -2173. Given that the statute specifies that a “general contractor” is a person who contracts directly with the owner, it appears that the legislature intended that the licensing requirement for contractors to apply to a broader group of contractors. Id. § 37:2150.1(6)(a). In 2002, the Louisiana Attorney General issued an advisory opinion interpreting the contractor’s licensing statutes to apply to construction managers. Op. La. Att’y Gen., No. 02-0145 (2002). Additionally, in the public works context La. Stat. Ann. § 38:2225.2.4 requires a construction management at-risk contractor to be properly licensed as a contractor. Thus, it appears that construction managers should obtain contractor licenses prior to engaging in projects in Louisiana.