Enforceability of Limitation of Liability Clauses
Author: Saloni Shah and Joanna Kopcyzk
Limitations of Liability
Where the parties to an agreement are sophisticated business entities engaged in a negotiated arm’s length transaction, Massachusetts courts recognize the right of parties to contractually limit liability. See e.g., CareOne Mgmt., LLC v. Navisite, Inc., No. 1484-cv-378BLS2, 2017 WL 2803060, at *7 (Mass. Sup. Ct. Apr. 25, 2017) (upholding limitation of remedies and liability in contract for information technology services); Burke v. Conversent Commc’ns of Mass., Inc., 907 N.E.2d 265, at *1 (Mass. App. Ct. 2009) (upholding limitation of liability clause in contract for Internet services because it was not unconscionable); see also Md. Cas. Co. v. NSTAR Elec. Co., 30 N.E.3d 105, 111 (Mass. 2015) (holding that limitation of liability clause in tariff limited electric utility’s liability to nonresidential customers for special, indirect, or consequential damages). Parties may also contractually limit remedies and warranties in sales contracts. Mass. Gen. Laws Ann. ch. 106, §§ 2-316, 2-719(1)-(3) (West 2021); see also, Canal Elec. Co. v. Westinghouse Elec. Corp., 548 N.E.2d 182, 185-87 (Mass. 1990) (enforcing a provision in a sales contract excluding indirect, special, incidental, and consequential damages for breach of warranty and applying the principle that typically “the agreed-upon allocation of commercial risk should not be disturbed” when involving “sophisticated commercial entities”); Deerskin Trading Post, Inc. v. Spencer Press, Inc., 495 N.E.2d 303, 307-08 (Mass. 1986) (upholding a limitation of damages provision limiting damages to refund of purchase price contained in a final price quotation). In fact, Massachusetts courts will uphold a disclaimer of consequential damages even though a remedy fails of its essential purpose because a disclaimer of consequential damages is considered “an entirely separate contractual provision from the limited remedy clause.” Canal Elec. Co., 548 N.E.2d at 185. Limitations of liability must be conspicuous. Logan Equip. Corp. v. Simon Aerials, Inc., 736 F. Supp. 1188, 1197 (D. Mass. 1987).
“[I]t is well settled that a contracting party can utilize an exculpatory clause to exempt it from its own liability.” Bouvier Bros., Inc. v. Baker Protective Servs., No. 93421, 1994 WL 879634, at *2 (Mass. Super. Apr. 15, 1994). Any ambiguities will be construed against the party benefitting from the exculpatory clause. Id. Exculpatory clauses will not be enforced if they involve fraud, deceit, or duress. Id. Nor will such clauses be enforced if they waive statutory duties and obligations or release a party from its gross negligence, unless they release a party from its prior violations. See White Constr. Co. v. Commonwealth, 418 N.E.2d 357, 360-61 (Mass. App. Ct. 1981) (holding that a provision in a contract between the Commonwealth and an architectural firm for design and construction supervision services which unconditionally released the architect from all liability before construction even began was unenforceable); Subaru of Wakefield, Inc. v. Subaru of New England, Inc., No. 99385, 1999 WL 818603, at *3 (Mass. Super. Aug. 26, 1999) (enforcing a release of claims provision because the release waived a violation of a statutory duty in connection with prior agreements); Zavras v. Capeway Rovers Motorcycle Club, 687 N.E.2d 1263, 1265 (Mass. App. Ct. 1997). Courts are more likely to uphold exculpatory clauses when sophisticated business entities agree to them. Adar Invs., LLC v. Bayview Loan Serv’g, LLC, 33 N.E.3d 1266, at *3 (Mass. App. Ct. 2015) (Table) (upholding exculpatory clause in agreement to purchase rental properties).
It is unclear whether a state-licensed professional in Massachusetts may use exculpatory clauses. In White Constr. Co. v. Commonwealth, 418 N.E.2d 357 (Mass. App. Ct. 1981), an appeals court in Massachusetts refused to enforce a clause that conferred upon an architectural firm a release from all liability, including for design errors, before the construction project ever began. Id. at 359-60. Although the court did not specifically rule on the issue of “whether a person licensed by the State to practice a profession may limit prospectively his liability for errors and omissions,” it analogized, in dicta, the inability of a physician to avoid liability for negligence, to that of a licensed construction or design professional. Id. at 362 n.15 (noting that attempts by physicians and hospitals to limit liability for negligence have been defeated on the grounds that such exculpatory provisions can only stand if the duties involved do not violate the public interest). See also Cunha v. Mulligan, 862 N.E.2d 77, at *2 n.5 (Mass. Appt. Cit. 2007) (Table) (similarly declining to decide whether a licensed professional may limit liability for errors and omissions prospectively by contract).
Massachusetts law prohibits any provision in certain construction contracts which require a subcontractor to indemnify any party for injuries to persons or damage to property not caused by the subcontractor or its employees, agents, or subcontractors. Mass. Gen. Laws Ann. ch. 149, § 29C (West 2021). Section 29C does not apply when a subcontractor agrees to assume indemnity obligations for the entire liability when both the subcontractor and the general contractor or owner are negligent. Herson v. New Boston Garden Corp., 667 N.E.2d 907, 914 (Mass. App. Ct. 1996). Nor does Section 29C apply when a construction subcontract contains “duty to defend” language that requires immediate payment of the indemnitee’s costs without a prior determination of parties’ fault. Id. A subcontractor’s mere presence at an accident scene is not enough to impose liability—the subcontractor must have caused the damage or injury. Miley v. Johnson & Johnson, 668 N.E.2d 369, 372 (Mass. App. Ct. 1996).
Enforceability of Waiver of Consequential Damages Clauses
Massachusetts courts enforce waiver of consequential damages clauses in the construction context. In Costa v. Brait Builders Corp., 972 N.E.2d 449, 459 (Mass. 2012), the court held that there is “no special policy reason to fashion an exception for waivers of consequential damages, particularly as there may be good reason for the parties in construction contracts to exclude such damages,” and accordingly vacated the lower court’s award of consequential damages. See Turner Constr. Co. v. MJ Flaherty Co., 2017 WL 2218780, at *4 (Mass. Dist. Ct. Mar. 8, 2017) (quoting Costa, 972 N.E.2d at 459 n.22) (“[U]nder Massachusetts law, clauses in construction contracts limiting the right to recovery consequential damages have long been recognized and enforced as an appropriate means to ‘limit the expense and unpredictability of construction contract litigation.’”). Such provisions preclude liability for damages that do not arise from the usual course of the breach of contract, but rather, are the consequences of special circumstances known to the parties at the time of the contract. Boylston Hous. Corp. v. O’Toole, 74 N.E.2d 288, 302–03 (Mass. 1947).
Although under Massachusetts law a design professional generally cannot limit liability for damages arising out of negligence, it appears that limits on consequential damages are not necessarily precluded. See, e.g., White Constr. Co. v. Commonwealth, 418 N.E.2d 357, 361 n.14 (Mass. App. Ct. 1981) (internal citations omitted) (“Texts which consider agreements for architectural services assume that the architect shall be liable for design defects, and, in discussing disclaimers of liability, do not go beyond disclaimers of responsibility for the acts of contractors and limits on consequential damages.”).
In the context of transactions for the sale of goods, the Massachusetts Uniform Commercial Code allows a buyer to recover consequential damages from the seller under appropriate circumstances. See Mass. Gen. Laws ch. 106 §§ 2-711 – 2-714, 2-715(2). However, Massachusetts code section 2-719 of chapter 106 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.
Application of Economic Loss Doctrine
Massachusetts courts recognize the economic loss doctrine, and bar “recovery for economic losses in tort-based strict liability or negligence cases absent personal injury or physical damage to one’s property.” Garweth Corp. v. Boston Edison Co., 613 N.E.2d 92, 93 (Mass. 1993). The Massachusetts Supreme Judicial Court has held that “[t]he economic loss doctrine applies not only to the purchase and sale of products but also to claims of negligent design and installation in a newly constructed home.” Berish v. Bornstein, 770 N.E.2d 961, 975 (Mass. 2002).
“When applying the economic loss doctrine to cases involving defects in new construction, [the Massachusetts Supreme Judicial Court] considers whether, taking the allegations as true, it is reasonable to infer that the enumerated defects and deficiencies [in the new construction] caused property damage beyond the defects … themselves. If not, judgment on the pleadings is appropriate.” Solfisburg v. Glenco, Inc., No. 18-cv-10266-IT, 2019 WL 4770951, at *4 (D. Mass. Sep. 30, 2019) (citations and internal quotation marks omitted). Notably, failure to assert the economic loss defense waives it. Herbert A. Sullivan, Inc. v. Utica Mut. Ins. Co., 788 N.E.2d 522, 543 (Mass. 2003) (quotations omitted) (“The long-standing rule in this Commonwealth … is that purely economic losses are unrecoverable in tort and strict liability actions in the absence of personal injury or property damage. … [But] [b]ecause [defendant] has not made this argument, it has been waived.”).
Exceptions to the Doctrine
The United States District Court for the District of Massachusetts has rejected an “unreasonable risk exception” to application of the doctrine. Sebago, Inc. v. Beazer East, Inc., 18 F. Supp. 2d 70, 94 (D. Mass. 1998). However, that same court also stated that it would uphold an exception for negligent misrepresentation claims that stem from contracts for services, but not for defective products. Id. Despite this, a state court later found that where “damages  are finite and foreseeable” the doctrine did not apply, because “[t]he rule is intended to preclude recovery for intangible and unknown damages for lost contract or economic opportunity.” Wyman v. Ayer Properties, LLC, 11 N.E.3d 1074, 1081 (Mass. 2014). In that case, the status of the parties was also important: the plaintiffs were trustees of a condominium trust suing a developer for negligent design and construction of common areas. Id. at 1076. The court held that the plaintiffs should retain a tort remedy because they had no contractual privity with the developer and thus no remedy in contract. Id. at 1081 (“The nature of condominium unit ownership supports our conclusion that claims such as those raised here do not fit into the rubric of claims intended to be covered by the [economic loss] rule.”). By contrast, where a contract remedy exists, application of the rule is much more likely. See Primary Color Sys. Corp. v. Willwork, Inc., No. 17-P-94, 2017 WL 6374861, at *1 (Mass App. Ct. Dec. 14, 2017).
Enforceability of No Damages for Delay Clauses
Massachusetts courts generally recognize no damages for delay provisions as valid and enforceable in public contracts. See Findlen v. Winchendon Hous. Auth., 553 N.E.2d 554, 555 (Mass. App. Ct. 1990) (recognizing validity of no damages for delay clause absent showing that delay was caused by arbitrary and capricious conduct by the awarding authority, but finding that government had waived enforcement); Reynolds Bros., Inc. v. Commonwealth, 586 N.E.2d 977, 981 (Mass. 1992) (enforcing no damages for delay clause in public contract).
Nonetheless, Massachusetts courts may decline to enforce no damages for delay clauses where an owner fails to provide “contractually-required extensions.” Central Ceilings, Inc. v. Suffolk Construction Co., 75 N.E.3d 40, 47 (Mass. App. Ct. 2017). In Suffolk, the court declined to enforce a no damages for delay clause where the contractor refused to grant the subcontractor time extensions, its sole remedy under the subcontract, and where the subcontractor’s damages were not truly “delay damages” but rather damages for the subcontractor’s increased workforce due to the compressed work schedule imposed by the contractor. Suffolk, 75 N.E.3d at 47. The court explained that the contractor’s breaches did not affect the subcontractor’s ability to complete work on time, but rather its ability to complete work within budget. Id.
Additionally, pursuant to Mass. Gen. Laws ch. 30, § 39O(a), certain public works contracts must contain the following language:
The awarding authority may order the general contractor in writing to suspend, delay, or interrupt all or any part of the work for such period of time as it may determine to be appropriate for the convenience of the awarding authority; provided however, that if there is a suspension, delay or interruption for fifteen days or more or due to a failure of the awarding authority to act within the time specified in this contract, the awarding authority shall make an adjustment in the contract price for any increase in the cost of performance of this contract but shall not include any profit to the general contractor on such increase; and provided further, that the awarding authority shall not make any adjustment in the contract price under this provision for any suspension, delay, interruption or failure to act to the extent that such is due to any cause for which this contract provides for an equitable adjustment of the contract price under any other contract provisions.
See also Reynolds Bros., Inc. v. Commonwealth, 586 N.E.2d 977, 980 (Mass. 1992) (explaining that if there is any conflict between a contract provision on damages for delay and the statute, the statute would prevail).
Strict Interpretation of Contract
Massachusetts courts strictly interpret contracts. In Massachusetts, where a contract is unambiguous the parties will be bound by the plain meaning of its terms. Balles v. Babcock Power Inc., 70 N.E.3d 905, 911-12 (Mass. 2017) (citing Gen. Convention of New Jerusalem in the U.S. of Am., Inc. v. Mackenzie, 874 N.E.2d 1087 (Mass. 2007)). When interpreting a contract, Massachusetts courts will “give effect to the parties’ intentions and construe the language to give it reasonable meaning where possible.” Brillante v. R.W. Granger & Sons, Inc., 772 N.E.2d 74, 79 (Mass. App. Ct. 2002) (quoting Baybank Middlesex v. 1200 Beacon Props., Inc., 760 F. Supp. 957, 963 (D. Mass. 1991)). If the contract language is clear, it alone will determine the contract’s meaning, but a court may consider extrinsic evidence if the language is ambiguous. Balles, 70 N.E.3d at 911. Massachusetts courts hold that contract language is ambiguous when it “can support a reasonable difference of opinion as to the meaning of the words employed and the obligations undertaken.” Id. (quoting Bank v. Thermo Elemental Inc., 888 N.E.2d 897, 907 (Mass. 2008)). When determining whether the language is ambiguous, Massachusetts courts will look to both the contested language and to the text of the contract as a whole. Id. at 912. Thus, once a judge determines that the contract is ambiguous on its face, Massachusetts courts will look to extrinsic evidence as an interpretive guide. Bank, 888 N.E.2d at 908. While Massachusetts courts consider and follow the general rule that contract ambiguities shall be resolved against the drafter of the instrument, this rule is secondary to the primary rules of contract interpretation of construing contracts so as to ascertain the intention of the parties. Shea v. Bay State Gas Co., 418 N.E.2d 597, 602 (Mass. 1981).
Prompt Payment Requirements (Public/Private)
Massachusetts Public – Mass. Gen. Laws ch. 30, §§ 39F, 39G, 39K (2022) (progress payments must be made within 30 days in the case of the Commonwealth (including local housing authorities), or within 15 days in the case of all other awarding authorities; final payment due within 65 days of substantial completion to both prime and sub; interest will accrue daily at a rate of 3% points above the rate charged by the Federal Reserve Bank of Boston; where applicable, all contracts between a general contractor and a subcontractor must contain certain statutory language pertaining to prompt payment; legal fees awarded to successful claimants).
Massachusetts Private – Mass. Gen. Laws ch. 149, § 29E (2022). All construction contracts with an original contract price of $3,000,000 or more and for which a lien may be established shall provide reasonable time periods for submission of a payment application, approval or rejection of a payment application, and payment under a payment application. The time period for submission of a payment application shall not exceed 30 days starting from the end of the first calendar month occurring at least 14 days after the party requesting payment began performance. The time period for approval or rejection of a payment application shall not exceed 15 days from submission, but this time period may be extended to the time period applicable to the party at the contract tier above the party seeking payment, plus 7 days. The time period for payment shall not exceed 45 days from approval of the payment application, unless payment is conditioned upon receipt of payment by a third person (to the extent payment may be conditional under Mass. Gen. Laws Ann. ch. 149 § 29E(e) (2022)). If an application for payment is not approved or rejected within the time period provided in the contract, then the application will be deemed approved unless it is rejected before the date payment is due.
False Claims Statute
Mass. Gen. Laws Ann. Ch. 12, §§ 5A-5O – The Massachusetts false claims statute mirrors the FCA. Massachusetts law also imposes liability for anyone who: 1) enters into an agreement with government officials knowing the agreement to contain false information, or 2) benefits from an inadvertent submission of a false claim or is the beneficiary of an overpayment from the government and fails to disclose this fact either within sixty (60) days of the date of discovery of the inadvertent submission or overpayment, or by the date that any corresponding cost report (if applicable) is due, whichever is later. Id. § 5B. The Massachusetts statute also extends liability to corporations for the acts of any of their agents with apparent authority. Id. Massachusetts law imposes a civil penalty between $5,000 and $11,000 and three times the amount of damages sustained by the government, including consequential damages, plus the government’s costs and expenses in bringing a civil action, including attorney’s fees, expert fees and costs of investigation. Id. Similar to the FCA, Massachusetts law 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 knowledge of the investigation and before the commencement of criminal prosecution, civil action, or administrative action. Id.
Licensing Requirements for Construction Managers
Massachusetts does not have a licensing requirement for construction managers; there is, however, a license requirement for construction supervisors. Specifically, the Code of Massachusetts Regulations requires that construction of all one- and two-family dwellings, and construction of all buildings with less than 35,000 cubic feet of space, be under the supervision of a licensed construction supervisor. See 780 Mass. Code Regs. 110.R5. Construction of buildings larger than 35,000 cubic feet is required to be under the supervision of a registered architect. See Mass. Gen. Laws Ann. ch. 112, § 60L.
Furthermore, Massachusetts requires public owners who plan to construct a building at a cost equal to or greater than $1,500,000 to use the services of an owner’s project manager that is independent of the designer, general contractor, or any subcontractor involved on the building project. To qualify as a project manager an individual must be registered in Massachusetts as an architect or professional engineer and have at least five years’ experience in construction and the supervision of construction of buildings, or a person, if a registered architect or professional engineer, who has at least seven years’ experience in the construction of buildings. Mass Gen. Laws Ann. ch. 149 § 44A1/2.