Enforceability of Limitation of Liability Clauses
Author: Saloni Shah and Joanna Kopcyzk
Limitations of Liability
Michigan courts recognize that “parties are generally free to agree to whatever they like, and, in most circumstances, it is beyond the authority of the courts to interfere with the parties’ agreement.” Wilkie v. Auto-Owners Ins. Co., 664 N.W.2d 776, 787-88 (Mich. 2003). Accordingly, Michigan courts uphold limitations of liability unless unconscionable. See St. Paul Fire & Marine Ins. Co. v. Guardian Alarm Co. of Mich., 320 N.W.2d 244, 246-47 (Mich. Ct. App. 1982) (upholding contract provision under which provider of burglar alarm service limited liability for its breach of contract to $250). In the commercial context, courts rarely find unconscionability. WXON-TV, Inc. v. A.C. Nielsen Co., 740 F. Supp. 1261, 1264 (E.D. Mich. 1990) (noting that courts will examine the bargaining power of the parties and whether the provision is substantively unreasonable in determining unconscionability).
Parties may also contractually modify or limit remedies and warranties in sales contracts. Mich. Comp. Laws Ann. §§ 440.2316, 440.2719 (West 2022). If a limited remedy fails of its essential purpose, courts will not enforce the limitation of liability. See Severn v. Sperry Corp., 538 N.W.2d 50, 54-55 (Mich. Ct. App. 1995) (permitting plaintiff to recover under standard Uniform Commercial Code warranty provisions because cattle feed grinder was defective).
Michigan courts enforce exculpatory clauses. See Skotak v. Vic Tanny Int’l, Inc., 513 N.W.2d 428, 429 (Mich. Ct. App. 1994) (“It is not contrary to this state’s public policy for a party to contract against liability for damages by its own ordinary negligence.”). However, Michigan courts are less likely to enforce exculpatory clauses where the parties are in unequal bargaining positions. Allen v. Mich. Bell Tel. Co., 171 N.W.2d 689, 692-94 (Mich. Ct. App. 1969) (refusing to enforce a limitation of liability clause in an advertising contract with a telephone company because plaintiff had no realistic alternative means to communicate with the same audience that the yellow pages reached).
In Phoenix Contractors, Inc. v. Gen. Motors Corp., 355 N.W.2d 673 (Mich. Ct. App. 1984), the Court of Appeals of Michigan held that a clause in a construction contract which precluded a subcontractor’s recovery of damages for delay was a valid exculpatory clause. Id. at 676. The court set fourth four exceptions to such an exculpatory clause. “These exceptions include situations where the delay: (1) was of a kind not contemplated by the parties; (2) amounted to an abandonment of the contract; (3) was caused by bad faith on the part of the contracting authority; or (4) was caused by the active interference of the other contracting party.” Id.
In Ric-Man Constr., Inc. v. Newyer, Tiseo & Hindo Ltd., the Court of Appeals of Michigan held that an engineer could enforce as against the general contractor an exculpatory provision in the prime contract. No. 329159, 2017 WL 188049, at *5-6 (Mich. Ct. App. Jan. 17, 2017). The provision provided that the engineer would not be liable for any decision it made in good faith. Id. Although the exculpatory provision applied to allegations of negligence that occurred during the construction phase, it did not apply to the engineer’s errors or omissions in the design of the project. Id.
Mich. Comp. Laws Ann. § 691.991(1) (West 2022) states that an agreement in a construction contract to indemnify another party for that party’s sole negligence is against public policy and is therefore void and unenforceable. Section 691.991(2) provides that in any contract with a Michigan-licensed architect, professional engineer, landscape architect, or professional surveyor for certain work, a public entity shall not require the professional to defend the public entity or any other party from claims or to assume any liability or indemnify the public entity or any other party for any amount greater than the professional’s degree of fault. Id. Section 691.991 is subject to prospective application only. In re Estate of Koch, No. 332583, 2017 WL 6502821, at *4 (Mich. Ct. App. Dec. 19, 2017).
Indemnification contracts will not be interpreted to indemnify the indemnitee against losses resulting from the indemnitee’s own negligent acts unless the contractual language is clear and unequivocal. Fischbach-Natkin Co. v. Power Process Piping, Inc., 403 N.W.2d 569, 571-73 (Mich. Ct. App. 1987). To avoid conflict with Section 691.991, parties may expressly provide that the indemnitee will not be protected if the injury or damage is caused by its sole negligence. Id. at 572 (citing Paquin v. Harnischfeger Corp., 317 N.W.2d 279 (Mich. Ct. App. 1982)). The court will then likely find that the parties intended to provide indemnity for all situations involving the indemnitee’s own negligence, except when the indemnitee’s negligence is the sole cause of the injury or damage. Id.
Enforceability of Waiver of Consequential Damages Clauses
At least one federal district court in Michigan has distinguished between “general” and “special” damages in its enforcement of a waiver of consequential damages clause in the construction context. See Performance Abatement Servs., Inc. v. Lansing Bd. of Water & Light, 168 F. Supp. 2d 720, 740 (W.D. Mich. 2001). In Performance Abatement, the subcontract agreement between the general contractor and subcontractor contained a provision which stated that “[n]either party shall be liable for special, incidental or consequential damages of any kind.” Id. at 728 (brackets in original). When the general contractor later tried to recover these same types of damages, the court upheld the limitation provided in the subcontract and refused to grant the general contractor’s claim. Id. at 740, 742. Further, Michigan courts recognize that “parties are generally free to agree to whatever they like, and, in most circumstances, it is beyond the authority of the courts to interfere with the parties’ agreement.” Wilkie v. Auto-Owners Ins. Co., 664 N.W.2d 776, 787–88 (Mich. 2003).
In the context of transactions for the sale of goods, the Michigan Uniform Commercial Code allows a buyer to recover consequential damages from the seller under appropriate circumstances. See Mich. Comp. Laws §§ 440.2711 – 440.2714, 440.2715(2).
However, Michigan code section 440.2719 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 Latimer v. William Mueller & Son, Inc., 386 N.W.2d 618, 637 (Mich. Ct. App. 1986) (“[C]onsequential damages may be limited or excluded unless an unconscionable result would be worked.”). Michigan courts will not enforce waiver of damages provisions when unconscionability is found or where the exclusion fails of its essential purpose. See, e.g., King v. Taylor Chrysler-Plymouth, Inc., 457 N.W.2d 42, 45–46 (Mich. Ct. App. 1990) (finding that a car warranty’s exclusion of incidental and consequential damages “failed in its essential purpose” and thus, plaintiff was entitled to pursue those remedies). However, courts rarely find unconscionability in the commercial context. See WXON-TV, Inc. v. A.C. Nielsen Co., 740 F. Supp. 1261, 1264 (E.D. Mich. 1990) (explaining that courts will examine the bargaining power of the parties and whether the subject provision is substantively unreasonable in determining unconscionability, and noting that “[u]nconscionability will rarely be found in a commercial contract”).
Application of Economic Loss Doctrine
Michigan courts have formally adopted the economic loss doctrine in its “intermediate” form. The default rule, established in 1992, bars tort recovery for purely economic losses resulting from the sale of goods. See Neibarger v. Universal Coop., Inc., 486 N.W.2d 612, 615 (Mich. 1992) (“Where … [tort] claims arise from a commercial transaction in goods and the plaintiff suffers only economic loss … such [tort] claims are barred by the economic loss doctrine.”). Indeed, the Supreme Court of Michigan in Neibarger went so far as to say that damage to other property may not be recovered in tort “where it is the result of a commercial transaction otherwise within the ambit of the UCC” and “where such property damage necessarily results from the delivery of a product of poor quality.” Id. at 620; see also Quest Diagnostics, Inc. v. MCI Worldcom, Inc., 656 N.W.2d 858, 862 n. 4 (Mich. Ct. App. 2002) (quoting Neibarger and stating that “Michigan’s economic loss doctrine is broader than other jurisdictions in that it not only includes damage to the product itself, but may also include damage to other property” where the Neibarger conditions are met). Michigan has also expanded application of the rule to bar tort claims by plaintiffs who are not in direct privity with the manufacturer. See, e.g., Crossing at Eagle Pond Apartments, LLC v. Lubrizol Corp., No. 18-2253, 2019 WL 6522050, at *3–*4 (6th Cir. Dec. 4, 2019) (unpublished) (listing cases).
The doctrine applies not only to commercial transactions between sophisticated parties (as was the case in Neibarger), but also to individual consumer transactions. See Sherman v. Sea Ray Boats, Inc., 649 N.W.2d 783, 788 (Mich. Ct. App. 2002). The doctrine will not be applied, however, when a plaintiff could not have anticipated a safety hazard involved in a product through bargaining and/or negotiation at the time of the purchase or transaction. See State Farm Fire & Cas. Co. v. Ford Motor Co., No. 287512, 2010 WL 866149, at *2 (Mich. Ct. App. Mar. 11, 2010); see also Quest Diagnostics, 656 at 864.
No Application to Service Contracts
The doctrine is not applied to service contracts in Michigan. See Frommert v. Bobson Constr. Co., 558 N.W.2d 239, 240 (Mich. 1996). However, where a contract involves a mixture of goods and services, Michigan courts will apply a test to determine whether the economic loss doctrine should be applied to the mixed contract. Id. The test involves determining whether the contract’s “predominant factor” or purpose is “the rendition of service, with goods incidentally involved,” or “a sales transaction, with labor incidentally involved.” Id. (citing Neibarger, 486 N.W.2d at 621). If it is the former, then the doctrine will not apply, but if it is the latter, the doctrine is invoked to bar the claim. Id.
Fraud in the inducement is a recognized exception to application of the economic loss doctrine in Michigan. Huron Tool & Eng’g Co. v. Precision Consulting Services, Inc., 532 N.W.2d 541, 543-44 (Mich. 1995); see also TSFR Burger, LLC v. Starboard Group of Great Lake, LLC, No. 19-12060, 2019 WL 5597139, at *7 (E.D. Mich. Oct. 30, 2019). However, a fraudulent inducement claim that is “not extraneous” to an underlying contractual dispute is barred by the rule. See Forjas y Macquinados, S.A. de C.V. et al., v. Mectron Eng’g Co., Inc., No. 17-10415, 2019 WL 498810, at *5 (E.D. Mich. Feb. 8, 2019) (citing Huron Tool & Eng’g Co. v. Precision Consulting Servs., Inc., 532 N.W. 2d 541, 545 (Mich. Ct. App. 1995). In determining whether a fraudulent inducement claim is “extraneous,” Michigan courts inquire whether the alleged misrepresentation was “but another fabric in the contract claim or an extraneous misrepresentation that actually induced the party to execute the contract.” Id. (citing Huber v. Crop Prod. Servs., Inc., No. 06-14564-BC, 2007 WL 2746625, at *6 (E.D. Mich. Sep. 19, 2007).
Enforceability of No Damages for Delay Clauses
In Michigan, no damages for delay provisions are generally valid and enforceable, but Michigan courts recognize exceptions where the delay: (1) is of a kind not contemplated by the parties; (2) amounts to an abandonment of the contract; (3) is caused by bad faith on the part of the contracting authority; or (4) is caused by the active interference of the other contracting party. Phoenix Contractors, Inc. v. Gen. Motors Corp., 355 N.W.2d 673, 676 (Mich. Ct. App. 1984); see also Macomb Mech. v. Lasalle Grp., No. 319357, 2015 WL 1880189, at *3 (Mich. Ct. App. Apr. 23, 2015) (‘“No-damage-for-delay clauses are commonly used in the construction industry and [are] generally recognized as valid and enforceable. However, because of their harsh effects, these clauses are to be strictly construed’ against the project owner.”); Interior/Exterior Specialist Co. v. Devon Indus. Grp., No. 276620, 2009 WL 49616 at *6 (Mich. Ct. App. Jan. 8, 2009) (“While the parties contemplated the possibility of delays when contracting, agreeing to a ‘no damages for delay’ clause, the evidence supports plaintiff’s claim that the delay in this case exceeded what either party anticipated at contracting. Therefore, the jury was not unreasonable in finding that the excessive delay, combined with plaintiff’s acquiescence in performing non-contractual work, constituted an abandonment of the contract.”).
Strict Interpretation of Contract
Michigan courts strictly interpret contracts. In Michigan, the cardinal rule when interpreting contracts is to ascertain the intention of the parties. Shay v. Aldrich, 790 N.W.2d 629, 637 (Mich. 2010); see also Kendzierski v. Macomb County, 931 N.W.2d 604, 612 (Mich. 2019) (“Our goal in contract interpretation is to give effect to the intent of the parties, to be determined first and foremost by the plain and unambiguous language of the contract itself.”). If the contract langue is unambiguous, Michigan courts will construe the contract according to its plain meaning. Id. On the other hand, if the language of a contract is ambiguous, courts may consider extrinsic evidence to determine the intent of the parties. Id. Michigan courts will find that a contract is ambiguous if two provisions “irreconcilably conflict with each other,” or “when [a term] is equally susceptible to more than a single meaning.” Kendzierski, 931 N.W.2d at 612. Michigan courts allow the use of extrinsic evidence to prove the existence of ambiguity as well as aid in the construction of the contract. City of Grosse Pointe Park v. Michigan Mun. Liab. & Prop. Pool, 702 N.W.2d 106, 115 (Mich. 2005). The rule of contra proferentem is “only to be applied if all conventional means of contract interpretation, including the consideration of relevant extrinsic evidence, have left the jury unable to determine what the parties intended their contract to mean.” Klapp v. United Ins. Group Agency, Inc., 663 N.W. 447, 455 (Mich. 2003).
Prompt Payment Requirements (Public/Private)
Michigan Public – Mich. Comp. Laws §§ 125.1561–125.1565 (2022) (public agency must pay within later of 30 days after architect or professional engineer’s approval of invoice, or 15 days after public agency’s receipt of funds to make the progress payment; reasonable interest on amounts past due may be included in next invoice).
Michigan Private – N/A
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).
Michigan – N/A
Licensing Requirements for Construction Managers
In Michigan, there are no express licensing requirements for construction managers. Michigan law, however, requires that a person engaged in the construction, maintenance and alteration of a residential structure be licensed. See Mich. Comp. Laws Ann. § 339.2404b. Specifically, a person must obtain a license if he or she for compensation “other than wages for personal labor only, undertakes with another or offers to undertake, or purports to have the capacity to undertake with another, for the erection, construction, replacement, repair, alteration, or addition to, subtraction from, improvement, wrecking of, or demolition of a residential structure,” or “building of a garage, or laying of concrete” on residential property. Id. § 339.2401. Residential structures are considered detached one-family or two-family dwellings and townhouses of not more than three stories. Id. If a construction manager performs any of the services above, he or she must be licensed as a residential builder or a residential maintenance and alteration contractor in Michigan.