Enforceability of Limitation of Liability Clauses
Author: Saloni Shah and Joanna Kopcyzk
Limitations of Liability
New Mexico courts generally uphold limitations of liability, provided that they do not seek to avoid all liability for one’s own negligence. The Court of Appeals of New Mexico in Fort Knox Self Storage, Inc. v. W. Techs., Inc., 142 P.3d 1, 5-6 (N.M. Ct. App. 2006) upheld a provision in an engineering contract limiting the engineer’s liability to $50,000.00. See also Wheeler Peak, LLC v. L.C.I.2, Inc., No. CIV 07-1117 JD/WDS, 2009 WL 1329115, at *9 (D.N.M. Apr. 13, 2009) (upholding a limitation of liability clause in a contract between company and contractor to construct condominiums, even though the provision was “lopsided”). Further, New Mexico’s anti-indemnity statutes do not apply to limitations of liability. Fort Knox Self Storage, Inc., 142 P.3d at 5.
Parties to sales contracts may limit or modify remedies and warranties, absent unconscionability. N.M. Stat. Ann. §§ 55-2-316, 55-2-719 (West 2021).
New Mexico courts recognize that parties are free to “enter into contracts that exculpate one party from liability for its own negligence, unless the agreements are ‘violative of law or contrary to some rule of public policy.’” United Rentals Nw., Inc. v. Yearout Mech., Inc., 237 P.3d 728, 734 (N.M. Ct. App. 2010) (quoting Berlangieri v. Running Elk Corp., 76 P.3d 1036 (N.M. 2003)). New Mexico courts analyze a “non-exclusive list of factors” to determine whether an exculpatory clause violates public policy. Levin v. Airgas Sw., Inc., No CIV 05-629 JB/WDS, 2006 WL 1305040, at *6 (D.N.M. Apr. 30, 2006) (citing Tunkl v. Regents of Univ. of Ca., 383 P.2d 441 (Cal. 1963)). Those six factors are: (1) whether it “concerns a business of a type generally thought suitably for public regulation”; (2) whether “[t]he party seeking exculpation is engaged in performing a service of great important to the public, which is often a matter of practical necessity for some members of the public”; (3) whether [t]he party holds himself [or herself] out as willing to perform this service for any member of the public who seeks it, or at least for any member coming wither certain established standards”; (4) whether, “[a]s a result of the essential nature of the service, in the economic setting of the transaction, the party invoking exculpation possesses a decisive advantage of bargaining strength against any member of the public who seeks his [or her] services”; (5) whether “[i]n exercising a superior bargaining power the party confronts the public with a standardized adhesion contract of exculpation, and makes no provision whereby a purchaser may pay additional reasonable fees and obtain protection against negligence”; and (6) whether “as a result of the transaction, the person or property of the purchaser is placed under the control of the seller, subject to the risk of carelessness by the seller or his . . . agents.” Id. (quoting Berlangieri, 76 P.3d at 1109-10 (internal quotations omitted)).
New Mexico law voids provisions in construction contracts that require a party to indemnify, hold harmless, insure, or defend another party for bodily injuries or damages to property resulting from, in whole or in part, the indemnitee’s negligence. N.M. Stat. Ann. § 56-7-1(A) (West 2021). A similar provision exists for leases of equipment. Id. § 56-7-3. However, a construction contract may require a party to indemnify, hold harmless, or insure the other only to the extent that the liability arises out of the indemnitor’s acts or omissions. Id. § 56-7-1(B)(1). A construction contract may also require a party to purchase a project-specific insurance policy. Id. § 56-7-1(B)(2).
N.M. Stat. Ann. § 56-7-2 (West 2021) invalidates provisions in agreements pertaining to a well for oil, gas or water, or to a mine for a mineral, that purport to indemnify the indemnitee against loss or liability for damages arising from: (1) the sole or concurrent negligence of the indemnitee; (2) the sole or concurrent negligence of an independent contractor who is directly responsible to the indemnitee; or (3) an accident occurring in operations carried on at the direction or under the supervision of an indemnitee in accordance with the method and means the indemnitee specified. Section 56-7-2 protects third parties whose person or property would be placed at risk by the indemnitee’s indifference to safety and is therefore not limited to the parties to an indemnity agreement. United Rentals Nw., Inc. v. Yearout Mech., Inc., 237 P.3d 728, 734 (N.M. 2010).
In Windham v. L.C.I.2., Inc., 268 P.3d 528, 532 (N.M. Ct. App. 2011), the court analyzed an indemnity clause between a contractor and a roofing subcontractor requiring the subcontractor to defend the contractor in a personal injury action for injuries resulting from the contractor’s negligence. Id. The court found that the statute did not void the clause in a suit by an injured employee of the subcontractor against the contractor because, although the employee alleged that the contractor was negligent, the cause of action arose out of the subcontractor’s negligence in performance of the agreement. Id.
A contract for rental equipment to be used in a construction project was considered a “construction contract” within the meaning of the statute. United Rentals, 237 P.3d at 731-32.
Enforceability of Waiver of Consequential Damages Clauses
New Mexico courts enforce contractual waivers of consequential damages in the construction context. For example, in Wheeler Peak, LLC v. L.C.I.2, Inc., No. Civ 07-1117, 2009 WL 1329115 (D.N.M. Apr. 13, 2009), the court determined that the waiver of consequential damages provision of the AIA A201-1997 standard general conditions was enforceable. See id. at *9; see also Fort Knox Self Storage, Inc. v. W. Techs., Inc., 142 P.3d 1, 5–6 (N.M. Ct. App. 2006) (enforcing a provision in an engineering contract limiting the engineer’s liability to $50,000). Generally, New Mexico courts do not interfere with a contractual bargain reached by parties unless it is determined that the “policy favoring freedom of contract ought to give way to one of the well-defined equitable exceptions, such as unconscionability, mistake, fraud, or illegality.” Nearburg v. Yates Petroleum Corp., 943 P.2d 560, 571 (N.M. Ct. App. 1997); see Wheeler Peak, 2009 WL 1329115, at *9 (upholding a limitation-of-liability clause in a condominium construction contract between a company and contractor even though the subject provision was “lopsided”).
In the context of transactions for the sale of goods, the New Mexico Uniform Commercial Code allows a buyer to recover consequential damages from the seller under appropriate circumstances. See N.M. Stat. Ann. §§ 55-2-711 – 55-2-714, 55-2-715(2). However, New Mexico code section 55-2-719 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.
Application of Economic Loss Doctrine
New Mexico courts recognize the economic loss doctrine in products liability cases between commercial parties. “[I]n commercial transactions, when there is no great disparity in bargaining power of the parties, economic losses from injury of a product to itself are not recoverable in tort actions; damages for such economic losses in commercial settings in New Mexico may only be recovered in contract actions.” AmRep S.W. v. Shollenbarger Wood Treating (In re Consolidated Vista Hills Retaining Wall Litig.), 893 P.2d 438, 446 (N.M. 1995) (quoting Utah Int’l, Inc. v. Caterpillar Tractor Co., 775 P.2d 741, 744 (N.M. Ct. App. 1989), cert. denied, 772 P.2d 884 (N.M. 1989)). “The Court adopted the rule ‘in order to allow commercial parties to freely contract and allocate the risk of defective products as they wish.’” Id. (quoting Utah Int’l). New Mexico’s economic loss rule does not bar a claim for indemnification. AmRep S.W., 893 P.2d at 447.
Prima Facie Tort
New Mexico is one of the few jurisdictions that recognizes a cause of action for “prima facie tort,” generally defined as tort liability that may be imposed “although the actor’s conduct does not come within a traditional category of tort liability.” Restatement (Second) of Torts § 870; see Schmitz v. Smentowski, 785 P.2d 726, 70 (N.M. 1990) (recognizing the cause of action).
In 2018, the Supreme Court of New Mexico considered a claim for prima facie tort in the context of a plaintiff alleging that the defendant had wrongfully terminated the contract between the parties. In Beaudry v. Farmers Ins. Exch., 412 P.3d 1100 (N.M. 2018), the plaintiff entered into an “agent appointment agreement” with the defendant insurance company to sell the defendant’s insurance policies. 412 P.3d at 1102. The contract permitted the defendant to terminate the contract if the plaintiff switched to another insurance carrier, and when the plaintiff did switch carriers, the defendant terminated the contract. Id. The plaintiff sued based on various causes of action, including prima facie tort. Id. at 1103. The plaintiff’s alleged damages included economic loss. Id. at 1108 (noting that the plaintiff alleged he had “lost the benefit of a lucrative agency relationship”). The defendants cited the economic loss doctrine in its arguments to the Court of Appeals of New Mexico and to the Supreme Court. See Beaudry v. Farmers Ins. Exch., 388 P.3d 662, 673–74 (N.M. Ct. App. 2016) (citing AmRep S.W. and the economic loss rule); see also Brief in Chief of Defendants, Beaudry v. Farmers Ins. Exch., 412 P.3d 1100 (N.M. 2018), No. S-1-SC-36181, 2017 WL 4563371, at *16–*17.
While not explicitly analyzing the case under the rubric of the “economic loss doctrine,” the Supreme Court of New Mexico utilized the basic tenets of the rule in holding that the plaintiff could not prevail on his prima facie tort claim. The court stated that New Mexico courts must “ensure that a prima facie tort claim does not evade other established doctrines of law generally.” Id. at 1105. In rejecting the plaintiff’s prima facie tort claim, the court found that such a tort claim would “undermine” important principles of contract law, including the freedom to contract and a contracting party’s ability to exercise its rights under a contract. Id. at 1106–07. Thus, Beaudry implicitly stands for the proposition that the underpinnings of the economic loss rule bar a claim for prima facie tort where a contract existed between the parties and where imposition of tort liability would serve to evade important principles of contract law.
Outside of Beaudry and the realm of products liability, New Mexico courts have not determined whether the economic loss doctrine applies to other claims. Recent New Mexico decisions have not made it clear whether the doctrine applies outside of products liability. See, e.g., Harvey E. Yates Co. v. Cimarex Energy Co., No. 12-857 JH/SMV, 2014 WL 11512599, at *16 (D.N.M. Mar. 5, 2014). The analysis in Beaudry focused exclusively on case law relating to prima facie tort claims and their peculiar nature. Beaudry, 412 P.3d at 1105 (holding that claims for prima facie tort—and only such claims—must not evade other doctrines of law). Therefore, extension of the holding in Beaudry to other tort claims is unlikely. Cf. Auge v. Stryker Corp., No. 14-1089 KG/SMV, 2019 WL 133213, at *3 (D.N.M. Jan. 8, 2019) (distinguishing Beaudry and the “novel” claim of prima facie tort from “established” tort doctrines like unjust enrichment).
Strict Interpretation of Contract
In New Mexico, the “the purpose, meaning and intent of the parties to a contract is to be deduced from the language employed by them” and when the language is unambiguous, “it is conclusive.” Rivera v. Am. Gen. Fin. Servs., Inc., 259 P.3d 803, 812 (N.M. 2011) (internal citations and quotations omitted); Mendoza v. Isleta Resort and Casino, 460 P.3d 467, 473 (N.M. 2020) (“If a contract is unambiguous, this Court’s role is to interpret the contract according to the intent of the contracting parties without manufacturing a new agreement.”). “When discerning the purpose, meaning, and intent of the parties to a contract, the court’s duty is confined to interpreting the contract that the parties made for themselves, and absent any ambiguity, the court may not alter or fabricate a new agreement for the parties.” Ponder v. State Farm Mut. Auto. Ins. Co., 12 P.3d 960, 964 (N.M. 2000) (quoting CC Housing Corp. v. Ryder Truck Rental, Inc., 746 P.3d 1109, 1111 (N.M. 1987)). However, when assessing whether a contractual provision is ambiguous or unclear, courts may consider extrinsic evidence surrounding the circumstances of the contract’s creation as well as “any relevant usage of trade, course of dealing, and course of performance.” C.R. Anthony Co. v. Loretto Mall Partners et. al., 817 P.2d 238, 242-43 (N.M. 1991) (citations omitted). New Mexico courts hold that a contract is ambiguous when the contract is “reasonably and fairly” open to multiple constructions, and the mere fact that the parties disagree as to meaning does not necessary establish ambiguity. Mendoza, 460 P.3d at 473 (citing Lenscrafters, Inc. v. Kehoe, 282 P.3d 758, 763 (N.M. 2012)). Ambiguities further exist when separate sections of the contract conflict with one another, when the provisions are susceptible to more than one meaning, or when the structure of the contract is illogical. Ponder, 12 P.3d at 964-65. To the extent only one party drafted a contract, New Mexico courts construe ambiguities against the party who drafted the contract. Castillo v. Arrieta, 368 P.3d 1249, 1253 (N.M. Ct. App. 2016).
Prompt Payment Requirements (Public/Private)
New Mexico Public – N.M. Stat. Ann. §§ 57-28-5 to 57-28-8 (2022) (owner to prime within 21 days of invoice or 45 days for local public body if contract clearly provides for payment later than 21 days; final payment within 10 days of certificate of completion upon presentation of required documents; prime to sub/sub to lower tier 7 days after payment; interest at 1.5% per month after 21st day).
New Mexico Private – N.M. Stat. Ann. §§ 57-28-1 to 57-28-11 (2022) (owner must make progress payments within 21 days of invoice; final payment within 10 days after certification of completion upon presentation of required documents; prime to sub/sub to lower tier 7 days after payment; interest at 1.5% per month after 21st day).
False Claims Statute
N.M. Stat. Ann. §§ 44-9-1 to 44-9-14 – The New Mexico Fraud Against Taxpayers Act (FATA) mirrors the FCA. FATA also imposes liability for false claims on those who benefit from an inadvertent submission of a false claim and fail to disclose the false claim to the state within a reasonable period of time after discovery. Id. § 44-9-3. FATA imposes civil penalties ranging between $5,000 and $10,000 for each violation plus treble damages sustained by the state, in addition to the costs of bringing a civil action and reasonable attorney’s fees. Id. § 44-9-3(C). Similar to the FCA, FATA 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.
Licensing Requirements for Construction Managers
Construction managers in New Mexico are required to obtain a contractor’s license pursuant to the Construction Industries Licensing Act (CILA) and relevant administrative regulations. N.M. Stat. Ann. § 60-13-3(C); N.M. Admin. Code § 188.8.131.52. CILA defines the activities that encompass contracting as “any person who undertakes, offers to undertake by bid or other means or purports to have the capacity to undertake, by himself or through others, contracting.” N.M. Stat. Ann. § 60-13-3. CILA’s definition of a contractor expressly includes a “construction manager who coordinates and manages the building process; who is a member of the construction team with the owner, architect, engineer and other consultants required for the building project; and who utilizes his skill and knowledge of general contracting to develop schedules, prepare project construction estimates, study labor conditions and advise concerning construction.” N.M. Stat. Ann. § 60-13-3(C).