Enforceability of Limitation of Liability Clauses
Author: Saloni Shah and Joanna Kopcyzk
Limitations of Liability
New York courts enforce limitations of liability. See ERE LLP v. Spanierman Gallery, LLC, 94 A.D.3d 492, 494 (N.Y. App. Div. 2012) (upholding agreement limiting liability to professional fees actually received pursuant to an engagement letter); Smith-Hoy v. AMC Prop. Evaluations, Inc., 52 A.D.3d 809, 862 (N.Y. App. Div. 2008) (upholding limitation of liability in agreement between home buyers and inspection company that limited company’s liability to the fee paid for its services). In Eldor Contracting Corp. v. Cty. of Nassau, 272 A.D. 2d 509, 509-10 (N.Y. App. Div. 2000), the court found that, by its acquiescent conduct, a contractor accepted the counteroffer tendered to it by its subcontractor, including limitations of liability in the subcontractor’s warranty providing that the contractor could not sue for consequential or incidental damages and that direct damages would be capped at the greater of $5,000 or the contract price. Id. However, in U.S. Energy Dev. Corp. v. Superior Well Servs., Inc., 155 A.D.3d 1553, 1554 (N.Y. App. Div. 2017), the court held that a limitation of liability in a mining company’s field invoices did not become part of the contract between the owner and mining company because the invoices were not provided to the owner until after the company completed its work. Id. Accordingly, the field invoices’ liability limitations did not bar the owner’s recovery of damages for the company’s alleged improper performance of hydraulic fracturing operations on wells. Id.
Parties to sales contracts may also modify or limit remedies and warranties, absent unconscionability. N.Y. U.C.C. Law §§ 2-316, 2-719 (McKinney 2021). Parties may resort to other remedies if the limited remedy fails of its essential purpose. Roneker v. Kenworth Truck Co., 944 F. Supp. 179, 184 (W.D.N.Y. 1996) (finding that a limited remedy “fails of its essential purpose when, while it may have appeared fair and reasonable at the inception of the contract, as a result of later circumstances it operates to deprive a party of a substantial benefit of the bargain”).
Exculpatory clauses are generally enforceable in New York, including provisions that exculpate liability for delay damages. S.N. Tannor, Inc. v. A.F.C. Enters., Inc., 276 A.D. 2d 363, 363-64 (N.Y. App. Div. 2000) (holding that general contractor was protected under subcontract’s no-damage-for-delay exculpatory clause from subcontractor’s claim to recover damages for extra work and delays allegedly caused by contractor’s inept administration of the project); Weydman Elec., Inc. v. Joint Schs. Constr. Bd., 140 A.D.3d 1605, 1606-07 (N.Y. App. Div. 2016) (holding that exculpatory no damages for delay clause barred subcontractor’s claims against project owner and its construction manager); Kalisch-Jarcho, Inc. v. City of N.Y., 448 N.E.2d 413, 416 (N.Y. 1983). New York courts also enforce exculpatory clauses contained in invitations for bids. Michael J. Torpey, Inc. v. Consol. Edison Co. of N.Y., Inc., 99 A.D.2d 484, 484 (N.Y. App. Div. 1984) (finding that, in light of exculpatory language in power company’s invitation for bids for excavation work, contractor could not complain that work assigned deviated from “typical layouts” attached to the invitation). However, an exculpatory clause that places the burden on the contractor to investigate the site and discover potential problems is unenforceable if the state is aware of such problems. Laura Roofing & Renovating Co. v. Bd. of Educ. of City of N.Y., 57 A.D.2d 586, 586 (N.Y. App. Div. 1977). New York courts will not enforce exculpatory agreements that exempt a party from willful or gross negligence, Austro v. Niagara Mohawk Power Corp., 487 N.E.2d 267, 267 (N.Y. 1985), or where the state misrepresents certain conditions in relation to a construction contract. Rusciano Constr. Corp v. New York, 37 A.D.2d 745, 746 (N.Y. App. Div. 1971).
New York courts have recognized two exceptions to the general enforceability of exculpatory clauses. The first voids limits on liability when there is a disparity in bargaining power. The second renders the clause unenforceable when the breaching party’s conduct “smacks of intentional wrongdoing.” In re Lyondell Chemical Co., 544 B.R. 75, 84 (Bankr. S.D.N.Y. 2016).
New York law invalidates any indemnification provision in a construction contract that purports to indemnify an indemnitee for injury or damage caused by or resulting from the negligence, in whole or in part, of the indemnitee. N.Y. Gen. Oblig. Law § 5-322.1 (McKinney 2021). Additionally, any clause in a construction contract that purports to condition a subcontractor or materialman’s right to file a claim and/or commence an action on a payment bond on exhaustion of another legal remedy is void and unenforceable. Id.
N.Y. Gen. Oblig. Law § 5-323 (McKinney 2021) voids contractual provisions where a contractor exempts himself from liability for injuries to person or property caused by the contractor’s negligence as a result of work performed in connection with the construction, maintenance and repair of real property.
N.Y. Gen. Oblig. Law § 5-324 (McKinney 2021) voids provisions in contracts entered into by owners, contractors, subcontractors or suppliers whereby an architect or engineer is indemnified for damages resulting from defects in maps, plans, designs or specifications prepared by the architect or engineer.
An indemnification agreement that authorizes indemnification “to the fullest extent permitted by the law” does not run afoul of New York’s anti-indemnity provisions. Marquez v. L & M Dev. Partners, Inc., 43 Misc. 3d 1220(A), at *16-17 (N.Y. App. Div. May 1, 2014), aff’d as modified by Marquez v. L&M Dev. Partners, Inc., 141 A.D.3d 694 (N.Y. App. Div. 2016). An owner or contractor who was not actually negligent may still receive indemnification even if the contract language purports to provide indemnification for the owner’s or general contractor’s own negligence. 126 Newton St., LLC v. Eng’g Servs. Assocs., P.C., 42 Misc. 3d 1227(A), at *3 (N.Y. App. Div. Feb. 24, 2014). New York’s anti-indemnity statute also permits a partially negligent general contractor to seek indemnification from its subcontractor as long as the indemnification provision does not purport to indemnify the general contractor for its own negligence. Brooks v. Judlau Contracting, Inc., 898 N.E.2d 549, 550 (N.Y. 2008).
Enforceability of Waiver of Consequential Damages Clauses
New York courts have directly addressed, and typically enforce, contractual waivers of consequential damages in the construction context. For example, in Mu Chapter of Sigma Pi Fraternity of the U.S., Inc. v. Northeast Construction Services, 684 N.Y.S.2d 872 (N.Y. Sup. Ct. 1999), the court determined that the waiver of consequential damages provision of the AIA A201-1997 standard general conditions is enforceable. See id. at 876; see also Pacnet Network Ltd. v. KDDI Corp., No. 602182/08, 2009 WL 2999200, at *7 (N.Y. Sup. Ct. Sept. 16, 2009) (unpublished) (enforcing clause excluding consequential damages in design and construction contract and noting that “[c]ontractual limitations on liability are enforceable, except that a party cannot avoid liability for damages caused by ‘conduct that evinces a reckless disregard for the rights of others or “smacks” of intentional wrongdoing’” (quoting Obremski v. Image Bank, Inc., 816 N.Y.S.2d 448, 450 (N.Y. App. Div. 2006))); Duane Reade v. 405 Lexington, L.L.C., 800 N.Y.S.2d 664, 666–67 (N.Y. App. Div. 2005) (affirming dismissal of commercial tenant’s action against landlord for lost profit damages sustained during a renovation project where a waiver clause in the lease shielded the landlord from liability for business interruption losses and did not violate public policy); Bristol Vill., Inc. v. Louisiana-Pac. Corp., 170 F. Supp. 3d 488, 505–07 (W.D.N.Y. 2016) (where developer brought putative class action against manufacturer of product used in construction of assisted living facility alleging, inter alia, that the limitation of consequential damages provision in the warranty was unconscionable, court granted summary judgment in favor of defendant, noting that plaintiff had failed to present evidence either that it was not afforded a meaningful choice in selecting the defective product or that it had been placed in an unfair bargaining position).
New York courts have addressed waiver of consequential damages provisions in other, non-construction contexts as well. See, e.g., Biotronik A.G. v Conor Medsystems Ir., Ltd., 11 N.E.3d 676, 681–83 (N.Y. 2014) (holding that because plaintiff had paid the defendant for a product at a price calculated as a percentage of plaintiff’s net sales of the product, the plaintiff’s lost profits were general damages and thus not subject to the waiver of consequential damages). Generally, New York courts recognize that competent contracting parties should be held to bargains made freely and voluntarily because the “interest of society and public policy require the utmost freedom of contracts within the law.” Cuciniello v. Cuciniello, 378 N.Y.S.2d 976, 977 (N.Y. Sup. Ct. 1976); see also Bristol Vill., 170 F. Supp. 3d at 505 (“New York law is well-settled that ‘[c]ontractual exculpatory and limitations of liability clauses are enforceable.’” (alteration in original; quoting David Gutter Furs v. Jewelers Prot. Servs., Ltd., 594 N.E.2d 924, 924–25 (N.Y. 1992))).
In the context of transactions for the sale of goods, the New York Uniform Commercial Code allows a buyer to recover consequential damages from the seller under appropriate circumstances. See N.Y. U.C.C. Law §§ 2-711 – 2-714, 2-715(2). However, New York U.C.C. 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 Laidlaw Transp., Inc. v. Helena Chem. Co., 680 N.Y.S.2d 365, 367 (N.Y. App. Div. 1998) (clauses limiting consequential damages to a product’s purchase price “are enforceable unless they fail of their essential purpose”); Roneker v. Kenworth Truck Co., 944 F. Supp. 179, 184 (W.D.N.Y. 1996) (noting that a limited remedy “fails in its essential purpose when, while it may have appeared fair and reasonable at the inception of the contract, as a result of later circumstances it operates to deprive a party of a substantial benefit of the bargain”).
Application of Economic Loss Doctrine
New York courts recognize the traditional intermediate application of the economic loss rule. See 126 Newton St., LLC v. Allbrand Commercial Windows & Doors, Inc., 121 A.D.3d 651, 652 (N.Y. App. Div. 2014) (“The economic loss rule provides that tort recovery in strict products liability and negligence against a manufacturer is not available to a downstream purchaser where the claimed losses flow from damage to the property that is the subject of the contract and personal injury is not alleged or at issue.”); Bellevue S. Assocs. v. HRH Constr. Corp., 579 N.E.2d 195, 200 (N.Y. 1991). Like other states, New York does not apply the doctrine to bar recovery for damage to property “other than the property that is the subject of the contract.” Elec. Waste Recycling Grp., Ltd. v. Andela Tool & Mach., Inc., 968 N.Y.S.2d 765, 767 (N.Y. App. Div. 2013). However, New York courts consider damage to property by an integrated component to constitute “damage to the property that is the subject of the contract” and therefore barred from tort recovery. See, e.g., Landtek Group, Inc. v. N. Am. Specialty Flooring, Inc., No. CV-14-1095, 2016 WL 11264722, at *18 (E.D.N.Y. Aug. 12, 2016) (collecting cases).
“In determining whether the economic loss doctrine applies, a court should consider the nature of the defect, the injury, the manner in which the injury occurred, and the damages sought.” Hodgson, Russ, Andrews, Woods & Goodyear, LLP v. Isolatek Inter. Corp., 300 A.D.2d 1051 (N.Y. App. Div. 2002). Some courts have declined to apply the rule where the damages sought are not the result of “the failure of [the products or services] to perform their intended purpose,” but instead result from a “defective and unsafe” product or service. See, e.g., U.S. Energy Dev. Corp. v. Superior Well Servs., Inc., 155 A.D.3d 1553, 1554 (N.Y. App. Div. 2017) (citing Hodgson, 300 A.D.2d at 1052–53 and Triple R Farm P’ship v. IBA, Inc., 21 A.D.3d 1260, 1261 (N.Y. App. Div. 2005).
New York courts have applied the doctrine in both products liability and construction-related cases. See, e.g., Archstone v. Tocci Bldg. Corp. of N.J., 101 A.D.3d 1059, 1061–62 (N.Y. App. Div. 2012) (barring a negligence claim against a general contractor based upon an alleged design defect in stone cladding system). Previously, New York courts acknowledged a cause of action for a negligently performed construction contract. See, e.g., Consolidated Edison Co. of N.Y. v. Westinghouse Elec. Corp., 567 F. Supp. 358, 363–65 (S.D.N.Y. 1983). This line of cases has been called into question, however. See Niagara Mohawk Power Corp. v. Stone & Webster Eng’g Corp., 725 F. Supp. 656, 665 (N.D.N.Y. 1989) (“The holding of Consolidated Edison with respect to economic loss is in direct conflict with more recent decisions which hold that New York law does not recognize a negligence cause of action when economic loss alone is involved.”).
Independent Duty Exception
New York courts also recognize the “well established principle that a simple breach of contract is not to be considered a tort unless a legal duty independent of the contract itself has been violated” in construction cases. Dormitory Auth. v. Samson Construction Co., 94 N.E.3d 456, 460 (N.Y. 2018) (citing Clark-Fitzpatrick, Inc. v. Long Island R.R., 516 N.E.2d 190, 193 (N.Y. 1987)). In order to be actionable, an independent legal duty “must spring from circumstances extraneous to, and not constituting elements of, the contract, although it may be connected with and dependent upon the contract.” Clark-Fitzpatrick, 516 N.E.2d at 193. The Court of Appeals has identified “several types of defendants” who may take on such independent tort duties, “including professionals.” Dormitory Auth., 94 N.E. 3d at 460; cf. Hydro Inv’rs, Inc. v. Trafalgar Power, Inc., 227 F.3d 8, 18 (2d. Cir. 2000) (“[T]he better course is to recognize that the rule allows such recovery in the limited class of cases involving liability for the violation of a professional duty. To hold otherwise would in effect bar recovery in many types of malpractice actions.”). Put another way, an independent duty arises where “a special relationship” has been created “that requires the defendant to protect against the risk of harm to plaintiff.” Travelers Cas. & Sur. Co. v. Dormitory Auth.-State of New York, 734 F. Supp. 2d 368, 378 (S.D.N.Y. 2010). New York courts have barred such claims, however, when the parties were not in privity. See id. at 387–88 (barring a third-party professional negligence claim against a construction manager).
There is a limited exception to the economic loss rule in New York for claims of negligent misrepresentation. See Travelers, 734 F. Supp. 2d at 379 (citing Parrott v. Coopers & Lybrand, L.L.P., 741 N.E.2d 506, 508 (N.Y. 2000); see also Cornelia Fifth Ave., LLC. v. Canizales, 2017 WL 1034644, at *3 (S.D.N.Y. Mar. 16, 2017). However, this exception requires “a showing that there was either actual privity of contract between the parties or a relationship so close as to approach that of privity” such that there is the functional equivalent of privity. Travelers, 734 F. Supp. 2d at 379. To establish the functional equivalent of privity in this context, a party must show: (1) that the party making the statement is aware the information will be used for a particular purpose; (2) that the injured party relied on the statement in furtherance of that purpose; and (3) some conduct by the statement maker linking it to the relying party and evidencing understanding of that reliance. Id. As this is a limited exception to the economic loss rule, the above standard is strictly applied by New York courts, and plaintiffs face a “heavy burden” in pursuing such claims. Id.
Enforceability of No Damages for Delay Clauses
No damages for delay clauses are generally valid and enforceable in New York. New York courts recognize exceptions for: (1) bad faith or willful, malicious or grossly negligent conduct; (2) uncontemplated delays; (3) delays amounting to abandonment of contract; or (4) delays resulting from breach of contract. Corinno Civetta Constr. Corp. v. City of New York., 493 N.E.2d 905, 909-10 (N.Y. 1986); Plato Gen. Constr. Corp. v. Dormitory Auth. of New York, 89 A.D.3d 819, 823 (N.Y. App. Div. 2011); Novak & Co., Inc. v. Dormitory Auth. of New York, 172 A.D.2d 653, 653-54 (N.Y. App. Div. 1991).
Strict Interpretation of Contract
New York courts strictly interpret contracts. In New York, agreements should be construed to effectuate the parties’ intent. Greenfield v. Philles Records, Inc., 780 N.E.2d 166, 170 (N.Y. 2002). The best evidence of what parties to a written agreement intend is what they convey in their writing. Id. Thus, a written agreement that is complete, clear, and unambiguous on its face must be enforced according to the plain meaning of its terms. Id. If an agreement on its face is reasonably susceptible of only one meaning, a court is not free to evaluate extrinsic evidence to determine the parties’ intent. Id. at 171. However, ambiguity arises in a contract when, read as a whole, the contract fails to disclose the parties’ intent or when the language used therein is susceptible to two reasonable interpretations. Ellington v. EMI, 21 N.E.3d 1000, 1003 (N.Y. 2014). If ambiguities exist in the document as a whole, New York courts may consider extrinsic evidence. Greenfield, 780 N.E 2d at 170. However, to assist in its interpretation, New York courts must read the documents “as a whole to ensure no undue emphasis is placed upon particular words or phrases,” and courts may not add or omit terms “nor distort the meaning of those used” to, in essence, “make a new contract for the parties under the guise of interpreting the writing.” Bailey v. Fish & Neave, 868 N.E.2d 956, 959 (N.Y. 2007). New York courts further follow the rule that ambiguities in a contract are construed against the drafter. Uribe v. Merchants Bank of New York, 693 N.E.2d 740, 743 (N.Y. 1998). However, the rule of construction against the drafter is not absolute. See e.g., Fair Oak, LLC v. Greenpoint Financial Corp., (N.Y. App. Div. 2d Dep’t 2006) (“[T]he rule construing language against the drafter does not apply because the parties agree that the terms are not ambiguous, each part was represented by counsel, and the agreement was extensively negotiated.”).
Prompt Payment Requirements (Public/Private)
New York Public – N.Y. State Fin. Law §§ 139-f, 179-f (McKinney 2022) (state agencies); N.Y. Gen. Mun. Law § 106-b (McKinney 2022) (municipal agencies); N.Y. Pub. Auth. Law § 2880 (McKinney 2022) (public authorities) (for all, owner to prime within 30 days of invoice or 15 days for small businesses; prime to sub/sub to lower tier within 7 days of payment; interest at statutory rate depending on type of public agency).
New York Private – N.Y. Gen. Bus. Law §§ 756–758 (McKinney 2022) (the party to whom an invoice is submitted has 12 business days to approve or disapprove all or a portion of the invoice by a written statement describing the items not approved; once an invoice is approved, payment must be paid as required by contract or within 30 days; contractor to sub/sub to lower tier within 7 days of receipt; interest on delayed payments at 1% per month or as otherwise agreed).
False Claims Statute
N.Y. State Fin. Law §§ 187-194 – The New York False Claims Act mirrors the FCA. New York’s Act imposes a civil penalty ranging between $6,000 and $12,000, plus three times the amount of damages, including consequential damages, that the state or local government sustains, in addition to costs, including attorneys’ fees, of a civil action brought to recover damages. Id. § 189. Similar to the FCA, the New York Act reduces the violator’s liability to not more 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
In New York, there are no statewide licensing requirements for construction managers or general contractors. Instead, New York construction managers and contractors may be required to obtain licenses at the local level, with licensing requirements varying by municipality.