Enforceability of Limitation of Liability Clauses
Author: Saloni Shah and Joanna Kopcyzk
Limitations of Liability
Maryland courts enforce limitation of liability provisions but limit such provisions to their express terms. Marriott Corp. v. Chesapeake & Potomac Tel. Co. of Md., 723 A.2d 454, 460-61 (Md. Ct. Spec. App. 1998) (stating that courts generally will not read limitations of liability to cover situations beyond their express terms); Schrier v. Beltway Alarm Co., 533 A.2d 1316, 1319, 1322 (Md. 1987) (holding that a clause in a contract between a corporation and an alarm company limiting liability to $250 was not unconscionable and noting that courts have designated such contract provisions as either exculpatory or as a limitation of liability); Tucker v. Am. Residential Servs., LLC, No. PX-15-1844, 2018 WL 1471683, at *6 (D. Md. Mar. 26, 2018) (“In general, Maryland honors parties’ freedom to contract, including agreements that limit future potential liability or damages.”). Maryland law also permits the contractual limitation of remedies and warranties in sales contracts. Md. Code Ann., Com. Law §§ 2-316, 2-719 (West 2021); Dowty Commc’ns Inc. v. Novatel Comput. Sys. Corp., 817 F. Supp. 581, 585 (D. Md. 1992) (applying Section 2-719 and enforcing a limitation of liability clause that excluded consequential damages in a contract between “two sophisticated corporations” for the sale of high-tech communications equipment).
Maryland law recognizes exculpatory clauses. For a clause to be enforceable, it “need not contain or use the word ‘negligence’ or any other magic words.’” Adloo v. H.T. Brown Real Estate, Inc., 686 A.2d 298, 304 (Md. 1996). An exculpatory clause is “sufficient to insulate the party from his or her own negligence ‘as long as [its] language . . . clearly and specifically indicates the intent to release the defendant from liability for personal injury caused by the defendant’s negligence.” Id. (alterations in original).
Maryland courts recognize three exceptions to the enforcement of exculpatory clauses: (1) a party will not be able to excuse itself from intentional harms or reckless, wanton, or gross negligence; (2) the contract cannot be the product of grossly unequal bargaining power; and (3) public policy prohibits exculpatory agreements in transactions affecting the public interest (i.e. public utilities, common carriers, innkeepers). BJ’s Wholesale Club, Inc. v. Rosen, 80 A.3d 345, 351-52 (Md. 2013) (citing Wolf v. Ford, 644 A.2d 522, 526 (Md. 1994)). The Maryland Court of Appeals has interpreted the “public interest” exception narrowly. Jaeger v. Int’l Renaissance Festivals, Ltd., No. 15-2632, 2017 WL 2001985, at *3 (D. Md. May 12, 2017).
Although many state courts have adopted the six factor test for exculpatory clauses set forth in Tunkl v. Regents of the Univ. of Ca., 383 P.2d 441 (Cal. 1963) (en banc), the Court of Appeals of Maryland in Wolf v. Ford, 644 A.2d 522, 535 (Md. 1994) in upholding the exculpatory clause at issue, held that this test is not dispositive as to the validity of an exculpatory clause, stating that “the six factors are not conclusive.”
Maryland law invalidates any indemnification provision relating to certain construction contracts that purport to indemnify an indemnitee for injury or damage caused by or resulting from the indemnitee’s sole negligence. Md. Code Ann., Cts. & Jud. Proc. § 5-401 (West 2021). Section 5-401 does not prohibit indemnification when the indemnitee’s negligence contributes to, but is not solely responsible for, the plaintiff’s injury. Turner Constr. Co. v. BFPE Int’l, Inc., No. 15-368, 2016 WL 1169938, at *11 (D. Md. Mar. 25, 2016); Leite v. Severstal Sparrows Point, LLC, Nos. WDQ-09-0742, WDQ-09-1158, 2010 WL 457513, at *3 n.5 (D. Md. Feb. 3, 2010). Maryland courts will not construe contracts to indemnify a person for his own negligence “unless an intention to do so is expressed in those very words or in other unequivocal terms.” Crockett v. Crothers, 285 A.2d 612, 615 (Md. 1972). For example, in Crockett, although the contract between an engineer and contractor provided that the contractor would indemnify the owner and engineer from all claims, damages and losses arising out of or resulting from the performance of work on a sewerage system, the court found that the contract did not obligate the contractor to indemnify the engineer against the engineer’s own negligence in preparing plans and specifications. Id. at 615. But see Kreter v. HealthSTAR Commc’ns, Inc., 914 A.2d 168, 177-78 (Md. Ct. Spec. App. 2007) (refusing to apply Crockett to an indemnification clause for negligence occurring before the indemnification contract was executed and because the agreement was not part of an ongoing contractual relationship between the parties).
Enforceability of Waiver of Consequential Damages Clauses
Maryland courts have not directly addressed the enforcement of contractual waivers of consequential damages in the construction context, but it appears that they may likely enforce such clauses because they enforce limitation-of-liability clauses in other contexts. Generally, Maryland courts hold that, “[p]arties have the right to make their contracts in what form they please, provided they consist with the law of the land; and it is the duty of the Courts so to construe them, if possible, as to maintain them in their integrity and entirety.” Post v. Bregman, 707 A.2d 806, 819 (Md. 1998) (citation omitted); see Baltrotsky v. Kugler, 910 A.2d 1089, 1096–97 (Md. 2006) (“[G]enerally speaking, the express terms of a contract bind the parties and courts should not meddle in the affairs of the parties by modifying terms of the agreement to assist a disadvantaged party.”). Indeed, Maryland courts enforce limitation-of-liability provisions, but limit such provisions to their express terms. Marriott Corp. v. Chesapeake & Potomac Tel. Co. of Md., 723 A.2d 454, 460–61 (Md. Ct. Spec. App. 1998); Leet v. Totah, 620 A.2d 1372, 1378 (Md. 1993) (quoting Maryland-Nat’l Capital Park & Planning Comm’n v. Washington Nat’l Arena, 386 A.2d 1216, 1231 (1978)) (“[U]nless clearly prohibited by statute, contractual limitations on judicial remedies will be enforced, absent a positive showing of fraud, misrepresentation, overreaching, or other unconscionable conduct on the part of the party seeking enforcement.”).
In the context of transactions for the sale of goods, the Maryland Uniform Commercial Code allows a buyer to recover consequential damages from the seller under appropriate circumstances. See Md. Code Ann., Com. Law §§ 2-711 – 2-714, 2-715(2). However, Maryland commercial code section 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 Potomac Constructors, LLC v. EFCO Corp., 530 F. Supp. 2d 731, 734–35 (D. Md. 2008) (analyzing Maryland law and recognizing that freedom to limit damages in a contract may be used to curtail recovery of consequential damages); Bond v. Nibco, Inc., 623 A.2d 731, 738–40 (Md. Ct. Spec. App. 1993) (upholding a faucet manufacturer’s limited warranty provision excluding consequential damages and thus barring plumber’s recovery for lost profits and reputational harm); McCarty v. E.J. Korvette, Inc., 347 A.2d 253, 258–62 (1975) (contract clause limiting consequential damages for injury to person and property due to breach of warranty on consumer goods was found to be unconscionable).
Application of Economic Loss Doctrine
Maryland courts recognize the economic loss doctrine in its “intermediate” form, which bars tort recovery for purely economic losses except in dangerous situations to persons or property. See A.J. Decoster Co.v. Westinghouse Elec. Corp., 634 A.2d 1330, 1333 (Md. 1994) (“[T]here is no recovery under a negligence theory for purely economic losses, unless the defect causes a dangerous condition creating a risk of death or personal injury.”); see also U.S. Gypsum Co. v. Mayor & City Council of Baltimore, 647 A.2d 405, 410 (Md. 1994) (“Tort recovery for purely economic losses has ordinarily not been allowed. Instead . . . economic loss … will normally be limited to contract causes of action, including breach of implied and express warranties, and, in the case of fraud, to an action for deceit.”). Maryland courts have applied the doctrine to construction cases. See, e.g., Balfour Beatty Infrastructure, Inc. v. Rummel Klepper & Kahl, LLP, 226 Md. App. 420, 130 A.3d 1024, cert. granted sub nom. Beatty v. Rummel, Klepper & Kahl, 135 A.3d 416 (Md. 2016), and aff’d, 155 A.3d 445 (Md. 2017) (holding that economic loss doctrine barred professional negligence and negligent misrepresentation claims by contractor against design engineering firm.).
Independent Duty Exception
Maryland courts recognize an exception to the doctrine where there is an independent duty between the parties. Chicago Title Ins. Co. v. Allfirst Bank, 905 A.2d 366, 377-80 (Md. 2006). Maryland courts focus on the nature of the harm likely to result from a failure to exercise due care and the relationship that exists between the parties. Id. at 378. If the failure to exercise due care merely creates a risk of economic loss, then the tort claim requires an “intimate nexus” between the parties which is met by “a contractual relationship … or its equivalent.” Id. However, “where the risk created is one of personal injury, no such direct relationship need be shown, and the principal determinant of duty becomes foreseeability.” Id.
Other Policy Exceptions
In the construction context, the Maryland Court of Appeals has also recognized an exception to the economic loss doctrine for a homeowner’s association claim based on construction defects against a developer and builder. Council of Co-Owners v. Whiting-Turner Contracting Co., 517 A.2d 336, 345 (Md. Ct. App. 1986) (holding that a “determination of whether a duty will be imposed in this type of case should depend upon the risk generated by the negligent conduct … .”). In that case, the court held that, “[w]here the risk [generated by the negligent conduct] is of death or personal injury the action will lie for recovery of the reasonable cost of correcting the dangerous condition.” Id.
Effect of Privity
Maryland courts generally require contractual privity to advance a claim for economic damages. Thus, “if the risk created by negligent conduct is no greater than one of economic loss, generally no tort duty will be found absent a showing of privity or its equivalent.” Jacques v. First Nat. Bank of Md., 515 A.2d 756, 761 (Md. 1986); see also Farmers Bank of Md.. v. Chicago Title Ins. Co., 877 A.2d 1145, 1153-54 (Md. 2005) (reviewing “the Jacques Court’s analysis of duty and the ‘economic loss rule’”). Maryland courts have excepted claims from the privity requirement, however, when the risk to potential plaintiffs is heightened. Jacques, 515 A.2d at 761 (“As the magnitude of the risk increases, the requirement of privity is relaxed—thus justifying the imposition of a duty in favor of a large class of persons where the risk is of death or personal injury.”).
Additionally, in Bel Air Carpet, Inc. v. Korey Homes Building Group, LLC, the Maryland Court of Special Appeals noted it could find no decision in Maryland answering “whether a lender owes a duty to ensure that a subcontractor receives payment from its disbursements to the general contractor absent any contractual obligation to do so.” 245 A.3d 64, 80 (Md. Ct. Spec. App. 2021). The Court of Special Appels held that the plaintiff-subcontractor failed to allege a cognizable duty of care owed to it by the defendant-lender, where the complaint did not allege any “linking conduct” between the parties to justify the subcontractor’s reliance on the lender to ensure its borrower’s funds (i.e., the general contractor’s funds) were paid to the subcontractor. See id. at 83-84 (“If we were to [the plaintiff’s] theory, we would alter the delicate contractual balance in the construction industry and the privity requirement of the economic loss doctrine.”).
Enforceability of No Damages for Delay Clauses
No damages for delay clauses are generally enforceable in Maryland. State Highway Admin. v. Greiner Eng’g Servs., Inc., 577 A.2d 363, 368-70 (Md. App. 1990). Notably, the court in Greiner declined to recognize an exception for delays not contemplated by the parties at the time of contracting but suggested that exceptions might be recognized for (1) intentional wrongdoing; (2) gross negligence; and (3) fraud or misrepresentation. Id. at 372.
Strict Interpretation of Contract
Maryland courts strictly interpret contracts and follow the objective law of contracts. Atlantic Contracting & Material Co., Inc. v. Ulico Cas. Co., 844 A.3d 460, 468-69 (Md. 2004) (“In determining the meaning of contractual language, Maryland courts apply the principal of the objective interpretation of contract.”). Applying the objective contract interpretation law, provides that “[t]he written language embodying the terms of an agreement will govern the rights and liabilities of the parties, irrespective of the intent of the parties at the time they entered into the contract, unless the written language is not susceptible of a clear and definite understanding. Dumbarton Imp. Ass’n, Inc. v. Druid Ridge Cemetery Co., 73 A.3d 224, 232 (Md. 2013) (quoting Slice v. Carozza Properties, Inc., 137 A.2d 687, 693 (Md. 1958)). Thus, the clear and unambiguous language of an agreement will not give way to what the parties thought the agreement meant or was intended to mean. Atlantic Contracting, 844 A.2d at 469. Where the contract is plain and unambiguous, there is no room for construction as the parties are presumed to have intended what they expressed. Spacesaver Systems, Inc. v. Adam, 98 A.3d 264, 268-69 (Md. 2014) (quoting Gen. Motors Acceptance Corp. v. Daniels, 492 A.2d 1306, 1310 (Md. 1985)); see also Shutter v. CSX Transp., Inc., 130 A.3d 1143, 1150-51 (Md. 2016) (quoting Pantazes v. Pantazes, 551 A.2d 916, 920 (Md. 1989)). The cardinal consideration when interpreting a contract’s terms is the “customary, ordinary, and accepted meaning” of the language used, and each term in the contract must be interpreted in context and given their ordinary and usual meaning.” Atlantic Contracting, 844 A.2d at 469. A contract is ambiguous if, when read by a reasonably prudent person, it is susceptible of more than one meaning. Weichert Co. of Maryland v. Faust, 19 A.3d 393, 400 (Md. 2011) (quoting Nova Research, Inc. v. Penske Truck Leasing Co., L.P., 952 A.2d 275, 283 (Md. 2008)). The admission of extrinsic evidence when the contract language is unambiguous is barred. Calomiris v. Woods, 727 A.2d 358, 363 (Md. 1999). However, extrinsic evidence may be used to assist in interpreting ambiguous contract language. Id. Maryland courts will construe ambiguous contract language against the drafter only after a failure of extrinsic or parol evidence to provide clarity to the ambiguous language. Cheney v. Bell Nat. Life Ins. Co., 556 A.2d 1135, 1138 (Md. 1989).
Prompt Payment Requirements (Public/Private)
Maryland Public – Md. Code Ann., State Fin. & Proc. §§ 15-103 to -108, 15-226 (West 2022) (owner must pay the prime contractor 30 days after payment is due or the invoice is received, whichever is later, and the prime contractor must pay the subcontractor/sub to lower tier within 10 days after receiving progress or final payment from the State; interest accrues at 9% per annum on amounts due to the prime contractor which remain unpaid more than 45 days after receipt of an invoice; however, there is no statutory interest rate on late payments to subcontractors).
Maryland Private – Md. Code Ann., Real Prop. §§ 9-301 to 9-305 (West 2022) (owner must pay prime contractor within the earlier of 30 days after an occupancy permit is granted, 30 days after the owner takes possession, or 7 days after a time or date for payment specified in the contract; contractor must pay subcontractor/sub to lower tier within 7 days after receiving payment from owner/prime; court may award interest at legal rate, and reasonable attorneys’ fees may be awarded in cases of bad faith by failure to pay undisputed amounts; undisputed retention proceeds must be paid within 90 days after the date of substantial completion).
False Claims Statute
Md. Code Ann., False Claims §§ 8-101 to 8-111 – Maryland imposes liability for false or fraudulent claims under the Maryland False Claims Act. Maryland imposes a civil penalty of not more than $10,000 per violation, plus treble damages sustained by the state. Md. Code Ann., False Claims § 8-102(c). The penalties permitted by the Act are expressly in addition to other criminal, civil, or administrative penalties under state or federal law. Id. § 8-102(e). Notably, Maryland’s Act requires the court to dismiss the action if the Government refuses to intervene or later withdraws its previous intervention as a party to the action. Id. §§ 8-104(a)(7), 8-104(b)(3).
Licensing Requirements for Construction Managers
There are no express licensing requirements for construction managers or general contractors in Maryland. The State of Maryland does, however, require other construction professionals to be licensed, including but not limited to those engaged in the construction business (such as certain types of contractors), professional engineers, and architects. Md. Code Ann., Bus. Reg. § 17-602; Md. Code Ann., Bus. Occ. & Prof. § 14-301; Md. Code Ann., Bus. Occ. & Prof. § 3-302. Therefore, although there are no separate licensing requirements for construction managers in Maryland, whether or not a license is required for a particular project depends on the nature of the services rendered. See generally Md. Code Ann., Bus. Occ. & Prof. For example, the practice of engineering is defined to include consultation, evaluation, and inspection of construction to ensure compliance with specifications and drawings, and design coordination, but explicitly does not include “the exclusive and sole performance of nontechnical management activities.” Md. Code Ann., Bus. Occ. & Prof. § 14-101(j).