Enforceability of Limitation of Liability Clauses
Author: Saloni Shah and Joanna Kopcyzk
Limitations of Liability
New Jersey courts enforce limitations of liability clauses. In Marbro, Inc. v. Borough of Tinton Falls, 688 A.2d 159 (N.J. Super. Ct. Law Div. 1996), the court upheld a provision in a construction contract that limited the liability of an engineer-consultant for its negligence to $32,500. Id. at 162. The court found the cap on damages, which represented the full amount of compensation due to the consultant, resulted from an arms-length transaction and did not implicate any public interest or policy that could have been offended by such a provision. Id.; see also Moreira Constr. Co. v. Moretrench Corp., 235 A.2d 211, 213 (N.J. Super. Ct. App. Div. 1967) (“Parties to a contract may agree to limit their liability as long as the limitation is not violative of public policy.”); Jacobsen Diamond Ctr., LLC v. ADT Sec. Servs., Inc., 2016 WL 3766236, at *7-8 (N.J. Super. Ct. July 15, 2016) (enforcing limitation of liability clause contained in alarm system supplier’s form contract). Parties to sales contracts may also limit or modify remedies and warranties. N.J. Stat. Ann. §§ 12A:2-316, 12A:2-719 (West 2021). Even if a limited remedy fails of its essential purpose, a court will still enforce a provision excluding consequential damages. Kearney & Trecker v. Master Engraving Co., 527 A.2d 429, 430 (N.J. 1987) (stating that “the enforceability of an exclusion of consequential damages does not necessarily depend on the effectiveness of the limited remedies afforded by the contract of sale”).
New Jersey courts recognize exculpatory clauses although they are disfavored and are subject to judicial scrutiny. Vitale v. Schering-Plough Corp., 146 A.3d 162, 169-70 (N.J. Super. Ct. 2016), aff’d as modified, No. 078294, 2017 WL 6398725 (N.J. Dec. 11, 2017). An exculpatory clause must unequivocally express a party’s intent to relinquish a legal right and that the decision to do so was made “voluntarily, intelligently, and with the full knowledge of its legal consequences.” Stelluti v. Casapenn Enters., LLC, 1 A.3d 678, 689-90 (N.J. 2010). New Jersey courts will not enforce an exculpatory provision if: (1) it adversely affects the public interest; (2) the exculpated party is under a legal duty to perform; (3) the contract involves a public utility or common carrier; or (4) it is unconscionable because, among other possible reasons, the parties had unequal bargaining power. Id. at 689 (quoting Gershon v. Regency Diving Ctr., Inc., 845 A.2d 720, 727 (N.J. Super. Ct. App. Div. 2004)); see also Lucier v. Williams, 841 A.2d 907, 916 (N.J. Super. Ct. App. Div. 2004) (declining to enforce a limitation of liability clause in a home inspection contract because it was part of an adhesion contract, the parties lacked equal bargaining power, and it violated New Jersey public policy as expressed in statutes that require home inspectors to be accountable for errors and omissions). New Jersey courts typically find that commercial entities with legal representation have equal bargaining power. See, e.g., Synnex Corp. v. ADT Sec. Servs., Inc., 928 A.2d 37, 46 (N.J. Super Ct. App. Div. 2007) (“Synnex is a large corporation that could have negotiated for a contract without an exculpatory clause or purchased a security system from another vendor.”).
N.J. Stat. Ann. § 2A:40A-1 (West 2021) invalidates any indemnification provision in a construction contract that purports to indemnify an indemnitee for injury caused by or resulting from the indemnitee’s sole negligence. See also Ryan v. Biederman Indus., 538 A.2d 1324, 1330 (N.J. Super Ct. App. Div. 1988) (finding that indemnification clause in a lease which did not indemnify the landlord for its own negligence as promisee was valid).
N.J. Stat. Ann. § 2A:40A-2 (West 2021) voids any contract provision requiring a party to indemnify an architect, engineer, or surveyor for damages, claims, losses or expenses caused by the professional’s sole negligence and arising out of (1) the preparation of maps, drawings, opinions, repairs, surveys, change orders, designs, or specifications, or (2) the professional’s giving of or failure to give instructions. The New Jersey Supreme Court in Carvalho v. Toll Bros. & Developers, 675 A.2d 209 (N.J. 1996) held that an agreement under which an engineering firm, which provided plans for a sewer project, was to be held harmless by a township was against public policy. Id. at 215. Accordingly, it would not be enforced in a negligence action brought against the engineering firm following the collapse of a trench based on a breach of duty owed by the firm to workers. Id.
These anti-indemnity statutes expressly do not apply to railroad construction or repair projects or “any contract, agreement, understanding or purchase order to which the State of New Jersey or any of its departments, agencies, or authorities is a party.” N.J. Stat. Ann. § 2A:40A-3 (West 2021).
New Jersey’s anti-indemnity statutes do not apply to limitation of liability clauses. Marbro, 688 A.2d at 164.
Enforceability of Waiver of Consequential Damages Clauses
New Jersey courts enforce contractual waivers of consequential damages in the construction context. For instance, in Atlantic City Associates LLC v. Carter & Burgess Consultants, Inc., No. 05-3227, 2008 WL 4951354 (D.N.J. Nov. 13, 2008), the court determined that the waiver of consequential damages provision of the parties’ contract for architectural, engineering, and other design services in connection with a construction project was enforceable. Id. at *3–4. Additionally, in Brunnquell Iron Works, Inc. v. Chesterfield Board of Education, No. A-2188-15T4, 2018 WL 911486 (N.J. Super. Ct. App. Div. Feb. 16, 2018) (unpublished), the court upheld a waiver of consequential damages clause in a construction contract, reasoning that “[b]ased on [the waiver provision’s] clear terms, [defendant] waived any claim against [plaintiff] for loss of use and consequential damages cause by fire.” Id. at *3.
Generally, New Jersey courts have held that parties to a construction contract are contractually free to allocate risks and responsibilities. See Mantilla v. NC Mall Assocs., 770 A.2d 1144, 1152 (N.J. 2001); Marbro, Inc. v. Borough of Tinton Falls, 688 A.2d 159, 162–63 (N.J. Super. Ct. Law Div. 1996) (holding that engineering services contract clause limiting engineering firm’s liability for professional negligence to the total amount of the firm’s fees was not void as against public policy); Moreira Constr. Co. v. Moretrench Corp., 235 A.2d 211, 213 (N.J. Super. Ct. App. Div. 1967) (holding that parties may agree to limit their liability provided the limitation does not violate public policy). New Jersey courts recognize the fundamental proposition that contracts will be enforced as written. Vasquez v. Glassboro Serv. Ass’n, 415 A.2d 1156, 1164 (N.J. 1980). The validity of such provisions, which are typically inserted into commercial contracts, is subject to established common law principles of unconscionability and considerations of public policy. See Chem. Bank of N.J. Nat’l Ass’n v. Bailey, 687 A.2d 316, 322 (N.J. Super. Ct. App. Div. 1997).
Notably, under the New Jersey Contractual Liability Act, the State “waives its sovereign immunity from liability arising out of an express contract or a contract implied in fact,” but “there shall be no recovery against the State for . . . consequential damages arising out of contract.” N.J. Stat. Ann. § 59:13-3.
In the context of transactions for the sale of goods, the New Jersey Uniform Commercial Code allows a buyer to recover consequential damages from the seller under appropriate circumstances. See N.J. Stat. Ann. §§ 12A:2-711 – 12A:2-714, 12A:2-715(2). However, New Jersey code section 12A: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 Jutta’s Inc. v. Fireco Equip. Co., 375 A.2d 687, 690 (N.J. Super. Ct. App. Div. 1977) (holding waiver of consequential damages provision of contract unconscionable and unenforceable where limitation clause was concealed and obscure). Specifically, the New Jersey Supreme Court has held that section 12A:2-719 “does not require the invalidation of an exclusion of consequential damages when limited contractual remedies fail of their essential purpose. It is only when the circumstances of the transaction, including the seller’s breach, cause the consequential damage exclusion to be inconsistent with the intent and reasonable commercial expectations of the parties that invalidation of the exclusionary clause would be appropriate under the Code.” Kearney & Trecker Corp. v. Master Engraving Co., 527 A.2d 429, 438 (N.J. 1987).
Application of Economic Loss Doctrine
The economic loss doctrine is applied in New Jersey and the doctrine has been codified for products liability cases in the Products Liability Act. See N.J. Stat. Ann. §§ 2A:58C-1–58C-11 (providing statutory remedy for products liability where damage is personal injury or damage to property “other than the product itself”); Dean v. Barrett Homes, Inc., 8 A.3d 766, 776 (N.J. 2010) (holding that the economic loss doctrine precluded homeowners from recovering damages for replacement of faulty exterior insulation and wall finish under the Products Liability Act where damage was to product itself). The Supreme Court of New Jersey has also acknowledged the viability of the “integrated product doctrine,” whereby a claim for “other property” damage fails if the product causing the damage is part of an integrated whole that includes the damaged property. Id. at 774–75 (holding that the plaintiffs could not proceed based upon damage to the faulty product but could proceed to the extent their claim was based upon damage to other parts of the home, because the faulty insulation and finish were not fully integrated into the home). Federal courts in New Jersey have also held that the doctrine bars slander-of-title claims. See, e.g., Carrera v. Bayview Loan Servicing, LLC, No. 18-cv-13824, 2019 WL 1051022, at *3 (D.N.J. Mar. 5, 2019).
Independent Duty Exception
New Jersey courts have recognized that a party may recover in tort for economic damages in certain limited circumstances. A party may sue under a tort theory for monetary loss relating to a contractual relationship when its counterpart owes an independent duty imposed by law in addition to the duties owed under their contract. Saltiel v. GSI Consultants, Inc., 788 A.2d 268, 280-81 (N.J. 2002). Examples include contracts involving physicians, attorneys, and insurance brokers. Id. The Saltiel court, however, did not apply the theory to an officer of a turfgrass corporation in privity with the plaintiff architect. Id. at 280 (“In this transaction, we are unable to discern any duty owed to the plaintiff that is independent of the duties that arose under the contract.”).
Exception for Design Professionals
New Jersey law has also recognized that a design professional has a cause of action for economic damages in tort against a contractor in the absence of a contractual relationship, when dismissal of the tort claim would leave the contractor without any other remedy. See Conforti & Eisele, Inc. v. John C. Morris Assocs., 418 A.2d 1290, 1292 (N.J. Super. Ct. Law Div. 1980), aff’d 489 A.2d 1233 (N.J. Super. Ct. App. Div. 1985) (denying motion to dismiss for failure to state a claim); see also SRC Constr. Corp. of Monroe v. Atl. City Housing Auth., 935 F. Supp. 2d 796, 800-01 (D.N.J. 2013).
Fraudulent Inducement Exception
It is unclear whether there is a fraudulent inducement or negligent misrepresentation exception to New Jersey’s economic loss rule. The Supreme Court of New Jersey has not spoken authoritatively on the subject and federal courts in New Jersey are divided. See, e.g., Cudjoe v. Ventures Trust 2013I-H-R by MCM Capital Partners, LLP, No. 18-10158, 2019 WL 949301, at *4 (D.N.J. Feb. 26, 2019). However, in 2019, one federal court stated that “precedent reveals a fairly clear test to determine whether a fraud claim is barred. As some decisions frame this test, a claim of fraud intrinsic to the contract cannot go forward, while a claim of fraud extrinsic to the contract can. As other decisions hold, fraud claims are barred unless they are ‘separate and distinct’ from performance of the contract.” Id. (citing cases). The same court stated that “[t]he economic loss doctrine also bars negligence claims for ‘false promises to perform as contract,’ but it does not bar claims for ‘misrepresentations made to induce a party into a contract.’” Id. (citation omitted).
Enforceability of No Damages for Delay Clauses
By statute, no damages for delay clauses are considered against public policy and are void and unenforceable in certain public contracts where the public entity’s negligence, bad faith, active interference, or other tortious conduct results in delayed performance. N.J. Stat. Ann. § 2A:58B-3(b). Likewise, under N.J. Stat. § 40A:11-19., no damage for delay clauses in local public contracts are unenforceable insofar as they seek “to limit a contractor’s remedy for the contracting unit’s negligence, bad faith, active interference, tortious conduct, or other reasons uncontemplated by the parties that delay the contractor’s performance, to giving the contractor an extension of time for performance under the contract.” See also N.J. Stat. § 18A:18A-41 (providing that such clauses are unenforceable in school board contracts).
Such clauses are generally enforceable in private contracts. Broadway Maint. Corp. v. Rutgers, 447 A.2d 906, 914 (N.J. 1982) (“Where a party to a contract containing a ‘no damage’ clause acts within the fair and legal import of its terms, he cannot be deprived of the benefit of his agreement unless, since every contract implies fair dealing between the parties, his conduct indicates bad faith or some other tortious intent.”) (quoting Gherardi v. Bd. of Educ., 147 A.2d 535, 544 (N.J. Super. Ct. 1958)).
Strict Interpretation of Contract
New Jersey courts interpret a contract as a whole to give a reasonable meaning to the expression of the parties’ intent whereas the courts will enforce contracts based on the intent of the parties, express terms of the contract, surrounding circumstances, and the underlying purpose of the contract. Cypress Point Condominium Ass’n, Inc. v. Adria Towers, L.L.C., 143 A.3d 273, 280 (N.J. 2016) (citing Manahawkin Convalescent v. O’Neill, 85 A.3d 947, 958 (N.J. 2014)); see also Newark Publishers’ Assoc. v. Newark Typographical Union No. 103, 126 A.2d 348 (N.J. 1956). However, where the terms of the contract are clear, it is the function of New Jersey courts to enforce the contract as written so as to not make a better contract for either of the parties. Id. (citing Kampf v. Franklin Life Ins. Co., 161 A.2d 717, 720 (N.J. 1960)); see also Manahawkin Convalescent v. O’Neil, 85 A.3d 947, 958-59 (N.J. 2014)(“If the language of a contract is plain and capable of legal construction, the language alone must determine the agreement’s force and effect.”). Typically, the construction of a contract will be a legal question, “but where there is uncertainty, ambiguity or the need for parol evidence in aid of interpretation then the doubtful provision should be left for the jury.” Great Atl. & Pac. Tea Co. v. Checchio, 762 A.2d 1057, 1061 (N.J. Super. Ct. App. Div. 2000). Ambiguity exists if the terms of the contract are susceptible to at least two reasonable alternative interpretations. Chubb Custom Ins. Co. v. Prudential Ins. Co. of America, 948 A.2d 1285, 1289 (N.J. 2008). To aid in the interpretation of an ambiguous contract, New Jersey courts will consider extrinsic evidence, including the circumstances of the parties at the time of contracting and the objectives of the contract that the parties sought to achieve. Checchio, 762 A.2d at 1060-61. The purpose of examining such extrinsic evidence is not to modify the contract, but to realistically assess the meaning of the contract in relation to its context and the general purpose of the agreement. Id. at 1060; see also Driscoll Constr. Co. v. N.J. Dep’t of Transp., 853 A.2d 270 (N.J. Super. Ct. App. Div. 2004). “Where a word or phrase is ambiguous, a court generally will adopt the meaning that is most favorable to the non-drafting party if the contract was the result of negotiations between parties of unequal bargaining power.” Chubb, 948 A.2d at 1289 (citing Pacifico v. Pacifico, 920 A.2d 73, 78 (N.J. 2007)). Further, while not an absolute rule, New Jersey courts frequently look to how other courts have interpreted similar language of standardized contracts to determine what parties may have intended, especially where rules in aid of interpretation fail to offer a clear result. Id.
Prompt Payment Requirements (Public/Private)
New Jersey Public – N.J. Stat. Ann. §§ 2A:30A-1 to A-2 (West 2022) (owner to prime within 30 days of billing date specified in contract and billing deemed approved 20 days after receipt unless written statement except where governing body voting/public meeting requirement applies; prime to sub/sub to lower tier 10 days after payment, unless otherwise agreed upon by the parties; interest at prime rate plus 1%; suspension of performance permitted in some instances for non-payment; attorneys’ fees to prevailing party).
New Jersey Private – N. J. Stat. Ann. §§ 2A:30A-1 to A-2 (West 2022) (owner to prime within 30 days of billing date specified in contract; prime to sub/sub to lower tier 10 days after payment, unless otherwise agreed; interest at prime rate plus 1%; attorneys’ fees to prevailing party).
False Claims Statute
N.J. Stat. Ann. §§ 2A:32C-1 to 2A:32C-18 – The New Jersey False Claims Act largely mirrors the FCA. New Jersey’s Act imposes the FCA’s civil penalties on violators for each false claim plus treble damages sustained by the state. Id. § 2A:32C-3. Similar to the FCA, New Jersey law reduces the violator’s liability to not less than twice the amount of damages that the state 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. § 2A:32C-4. The New Jersey Act permits joint and several liability. Id. § 2A:32C-3. When the Attorney General initiates a false claims action or assumes control of an action brought by another and prevails, the Attorney General shall be awarded reasonable attorney’s fees, expenses and costs from the defendant. Id. § 2A:32C-8. If, however, the Attorney General does not proceed with an action brought by an individual and the defendant is the prevailing party, the court may award the defendant reasonable attorney’s fees, expenses, and costs if the court finds that the action was brought improperly. Id. New Jersey’s Act includes anti-retaliation provisions for employees and expressly authorizes punitive damages, where appropriate, for violations of the anti-retaliation provision. Id. § 2A:32C-10.
Licensing Requirements for Construction Managers
Construction Managers are not generally required to be licensed in New Jersey for private work. Certain registrations and/or pre-qualifications may be required for public projects. For example, N.J. Stat. Ann. § 52:34-9.3 and N.J. Admin. Code § 17:19-3 require construction managers to be “prequalified” by the New Jersey Department of the Treasury, Division of Property Management and Construction (“DPMC”) for certain state public projects. The “Consultant Pre-qualification and Selection Procedures” discussed herein, define a “consultant” as “an architect engineer, construction manager, or other professional service firm providing technical and professional services in support of a design or construction project.” N.J. Admin. Code § 17:19-1.1.
Maintaining an active pre-qualification allows the construction manager to submit proposals for consideration in the consultant selection process for a particular project. Id. §§ 17:19-3.3; -3.6 to -3.7. To become pre-qualified, effective for a 24-month period, a Construction Manager must complete DPMC Form 48-A, which will be used to evaluate the firm’s viability, capabilities and other factors deemed relevant by DPMC. Id. § 17:19-3.3(a). A construction manager can increase its pre-qualification level by partnering with another pre-qualified construction manager for a specific project. Id. § 17:19-3.3(i). Various New Jersey state departments, as well as counties, municipalities, and local school districts seeking construction management services also rely upon the DPMC pre-qualification process. See, e.g., id. N.J. Stat. Ann. § 18A:7G-33; § 18A:18A-27.1 (providing that the pre-qualification process shall apply to general contractors, construction managers and contractors on school facilities projects) (emphasis added).
Construction managers seeking to bid on state projects or participate in public-private partnerships for state and county colleges also may be required to register annually with the Department of Labor and Workforce Development and pay annual fees under the Public Works Contractors Registration Act. Id. §§ 34:11-56.48 to -56.57; § 18A:64-85(e).