North Carolina

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Enforceability of Limitation of Liability Clauses

Limitations of Liability

North Carolina courts enforce limitations of liability.  Blaylock Grading Co., LLP v. Smith, 658 S.E.2d 680 (N.C. Ct. App. 2008).  In Blaylock, the Supreme Court of North Carolina upheld a limitation of liability in a land surveying contract between an engineering firm and a contractor that limited the engineer’s damages to $50,000.  Id. at 683.  Parties to sales contracts may also limit or modify remedies and warranties, absent unconscionability.  N.C. Gen. Stat. Ann. §§ 25-2-316, 25-2-719 (West 2021).  A limitation of remedy must be reasonable.  Billings v. Joseph Harris Co., 226 S.E.2d 321, 325 (N.C. 1976).

Exculpatory Clauses

Parties in North Carolina are free to allocate the risk of injury through exculpatory clauses, although courts strictly construe such clauses against the party claiming the exemption.  Gibbs v. Carolina Power & Light Co., 144 S.E.2d 393, 400 (N.C. 1965).  An exculpatory clause must use express language and clearly demonstrate the intent of the parties.  Id. at 467.  Courts have refused to enforce exculpatory clauses involving the performance of a duty of public service, or when a public duty is owed, or public interest involved, or where public interest requires the performance of a private duty.  Hal v. Sinclair Ref. Co., 89 S.E.2d 396, 398 (N.C. 1955); see also Thackurdeen v. Duke Univ., No. 1:16CV11008, 2018 WL 1478131, at *10 (M.D.N.C. Mar. 23, 2018).  The relative bargaining positions of the parties is relevant in determining the enforceability of an exculpatory clause.  Id.

Indemnity Agreements

North Carolina law voids provisions in construction contracts purporting to indemnify or hold harmless the promisee against liability for damages resulting from the negligence, in whole or in part, of the promisee.  N.C. Gen. Stat. Ann. § 22B-1 (West 2021).  However, “a construction indemnity agreement may purport to indemnify a promisee from damages arising from the negligence of the promisor” as long as the indemnification clause does not attempt to shield the promisee from its own negligence.  KaiserKane, Inc. v. N. Am. Roofing Servs., Inc., No. 1:15-cv-00189, 2017 WL 1293984, at *5 (W.D.N.C. Jan. 13, 2017).  North Carolina’s anti-indemnity statute does not apply when the indemnitee is a public utility.  Norfolk S. R.R. Co. v. Timec Co., No. 1:08CV99, 2009 WL 3787621, at * (M.D.N.C. Nov. 9, 2009) (noting that N.C. Gen. Stat. Ann. § 22B-1 excludes agreements with public utilities).  Nor does it apply to limitations of liability.  Blaylock, 658 S.E.2d at 683-84. 

If a portion of the indemnity clause is found invalid, the remainder of the provision may nevertheless stand if the invalid portion is severable.  Int’l Paper Co. v. Corporex Constructors, Inc., 385 S.E.2d 553, 554-55 (N.C. Ct. App. 1989); Jackson v. Associated Scaffolders & Equip. Co., Inc., 568 S.E.2d 666, 668 (N.C. Ct. App. 2002) (finding that the invalid provisions were not severable from the contract). 

Enforceability of Waiver of Consequential Damages Clauses

North Carolina courts enforce contractual waivers of consequential damages in the construction context.  For example, in Crescent University City Venture, LLC v. AP Atlantic, Inc., No. 15 CVS 14745, 2019 WL 3765313 (N.C. Super. Ct. Aug. 8, 2019) (unpublished), the court enforced a waiver of consequential damages provision in a construction contract and noted that the Supreme Court of North Carolina “has long held that parties may limit their liability for losses ordinarily categorized as consequential damages.”  Id. at *15; see also Severn Peanut Co. v. Indus. Fumigant Co., 807 F.3d 88, 92 (4th Cir. 2015) (observing that “consequential damage[s] limitations . . . appear to be commonly-enforced tools of doing business used throughout North Carolina”).

As a general proposition, the North Carolina Supreme Court has held: “People should be entitled to contract on their own terms without the indulgence of paternalism by courts in the alleviation of one side or another from the effects of a bad bargain. . . . It is only where it turns out that one side or the other is to be penalized by the enforcement of the terms of a contract so unconscionable that no decent, fairminded person would view the ensuing result without being possessed of a profound sense of injustice, that equity will deny the use of its good offices in the enforcement of such unconscionability.”  Gas House, Inc. v. S. Bell Tel. & Tel. Co., 221 S.E.2d 499, 504 (N.C. 1976), overruled on other grounds by 299 S.E.2d 763 (N.C. 1983); accord Blaylock Grading Co. v. Smith, 658 S.E.2d 680, 682 (N.C. Ct. App. 2008).  Indeed, the Blaylock court enforced a limitation-of-liability provision in a land surveying contract between an engineering firm and a contractor that limited the engineer’s damages to $50,000.  658 S.E.2d at 683–84.

In the context of transactions for the sale of goods, the North Carolina Uniform Commercial Code allows a buyer to recover consequential damages from the seller under appropriate circumstances.  See N.C. Gen. Stat. Ann. §§ 25-2-711 – 25-2-714, 25-2-715(2).  However, North Carolina code section 25-2-719 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 Martin v. Sheffer, 403 S.E.2d 555, 557 (N.C. Ct. App. 1991) (holding that to find unconscionability in a contract clause, “there must be an absence of meaningful choice on [the] part of one of the parties together with contract terms which are unreasonably favorable to the other [party]”).

Application of Economic Loss Doctrine

North Carolina courts recognize the economic loss doctrine.  See Lord v. Customized Consulting Specialty, Inc., 643 S.E.2d 28, 30 (N.C. Ct. App. 2007) ([T]he economic loss rule prohibits recovery for purely economic loss in tort, as such claims are instead governed by contract law.  A claimant may, however, recover in tort rather than contract for damages to property other than the product itself, if the losses are attributable to the defective product.”); see also  Severn Peanut Co. v. Indus. Fumigant Co., 807 F.3d 88, 94 (4th Cir. 2015) (stating North Carolina’s economic loss doctrine “prohibits recovery for purely economic loss in tort when a contract, a warranty, or the UCC operates to allocate risk”).  North Carolina courts have applied the doctrine in both products liability and construction cases.  See, e.g., Beaufort Builders, Inc. v. White Plains Church Ministries, Inc., 783 S.E.2d 35, 39–42 (N.C. Ct. App. 2016) (holding that economic loss rule barred project owner’s negligence claim against builder’s president, where owner also had breach of contract claim against builder).

The Ports Authority Exceptions

The Supreme Court of North Carolina first recognized the economic loss rule in N.C. State Ports Authority v. Lloyd A. Fry Roofing Co., 240 S.E.2d 345, 350 (N.C. 1978), rev’d in part on other grounds, Trustees of Rowan Tech. College v. J. Hyatt Hammond Assocs., Inc., 328 S.E.2d 274, 281 (N.C. 1985).  In articulating the doctrine, however, the Ports Authority Court also identified four types of injury that were not subject to the rule:

“(1) The injury, proximately caused by the promisor’s negligent act or omission in the performance of his contract, was an injury to the person or property of someone other than the promisee.

(2) The injury, proximately caused by the promisor’s negligent, or [willful], act or omission in the performance of his contract, was to property of the promisee other than the property which was the subject of the contract, or was a personal injury to the promisee.

(3) The injury, proximately caused by the promisor’s negligent, or [willful], act or omission in the performance of his contract, was loss of or damage to the promisee’s property, which was the subject of the contract, the promisor being charged by law, as a matter of public policy, with the duty to use care in the safeguarding of the property from harm, as in the case of a common carrier, an innkeeper or other bailee.

(4) The injury so caused was a [willful] injury to or a conversion of the property of the promisee, which was the subject of the contract, by the promisor.”

Ports Authority, 240 S.E.2d at 350–51.  The Ports Authority exceptions are still in use today.  See Beaufort, 78 S.E.2d at 40.

Independent Duty Exceptions

North Carolina courts recognize an exception where an independent duty to use reasonable care exists.  See Oates v. Jag, Inc., 333 S.E.2d 222, 225-26 (N.C. 1985).  In Oates, the Supreme Court of North Carolina permitted a negligent construction claim by homeowners, who were not the original purchasers, reasoning that “building contractors should be held to the general standard of reasonable care for the protection of anyone who may foreseeably be endangered by their negligence.”  Id.; but see Everts v. Parkinson, 555 S.E.2d 667, 679 (N.C. Ct. App. 2001) (acknowledging continued validity of Oates but declining to extend its holding to impose tort duty on contractor for negligent inspection occurring three years after construction).  North Carolina law also recognizes a common law duty of care exception for general contractor and subcontractor claims absent privity against an architect. See Davidson & Jones, Inc. v. Cnty. of New Hanover, 255 S.E.2d 580, 583-84 (N.C. Ct. App. 1979) (“The duty to exercise due care may arise out of contractual relations. However, a complete binding contract between the parties is not a prerequisite to a duty to use due care in one’s actions in connection with an economic relationship, nor is it a prerequisite to suit by a contractor against an architect.”); see also Frank Lill & Son, Inc. v. Carter & Burgess, Inc., No. 1:10CV587, 2011 WL 7053627, at *2 (M.D.N.C. Oct. 6, 2011).

Absence of Privity

The absence of privity between the parties has not served to bar tort claims under the economic loss rule in North Carolina, especially in the construction context.  See Buffa v. Cygnature Constr. and Dev., Inc., No. COA16-237, 2016 WL 7984216, at *4–*5 (N.C. Ct. App. Dec. 30, 2016) (permitting negligence claim by homeowner against window manufacturer without privity); Lord v. Customized Consulting Specialty, Inc., 643 S.E.2d 28, 31–33 (N.C. Ct. App. 2007) (permitting negligence claim by homeowners against subcontractor without privity). 

In 2021, the Supreme Court of North Carolina opined on a case in which the plaintiffs purchased a beach house and then sued the vendors and agents alleging negligence and negligent misrepresentation after discovering structural damage from past water intrusion after the purchase. See Cummings v. Carroll, 866 S.E2d 675, 679-80 (N.C. 2021). The court held that the economic loss rule did not bar the plaintiffs’ claims against the vendor and its agents, finding that the disclosure statement was not substantively incorporated into the parties’ purchase contract, and that the vendor’s agents lacked privity of contract necessary to invoke the economic loss rule, as they were not parties to the purchase contract. See id. at 686-87.

Fraud

In 2016, the Court of Appeals of North Carolina held that the economic loss rule did not bar a claim for fraud.  Bradley Woodcraft, Inc. v. Bodden, 795 S.E.2d 253, 259 (N.C. Ct. App. 2016).  Other courts, however, have limited the application of Bodden to only permit fraudulent inducement claims and have stated that fraud claims are not subject to a categorical exception to the economic loss doctrine.  See, e.g., Dillon v. Leazer Group, Inc., 374 F.Supp.3d 547, 558–59 (E.D.N.C. 2019).

Enforceability of No Damages for Delay Clauses

No damages for delay clauses are unenforceable as applied to delays caused by owners in public contracts.  Pursuant to N.C. Gen. Stat. § 143-134.3, “No contractual language forbidding or limiting compensable damages for delays caused solely by the owner or its agent may be enforced in any construction contract let by any board or governing body of the State, or of any institution of State government, or of any county, city, town, or other political subdivision thereof.”

No case has directly addressed whether no damages for delay clauses are enforceable in private construction contracts.  However, note that a public contract case decided before N.C. Gen. Stat. § 143-134.3 was enacted found that a no damage for delay clause was “unambiguous and enforceable.”  APAC-Carolina, Inc. v. Greensboro-High Point Airport Auth., 431 S.E. 2d 508, 516 (N.C. Ct. App. 1993).

Strict Interpretation of Contract

North Carolina courts strictly interpret contracts. In North Carolina the “heart of a contract is the intention of the parties.” Jones v. Palace Realty Co., 37 S.E.2d 906, 907 (N.C. 1946).  North Carolina courts view a contract from its four corners and will apply strict construction as long as the terms are plain and unambiguous.  Id.; see also Ussery v. Brach Banking and Trust Co., 777 S.E.2d 272, 279 (N.C. 2015).  North Carolina courts will interpret contracts as a whole and individual provisions within said contract must be interpreted within the context of the entire contract. Ussery, 77 S.E.2d at 279; see also Fulford v. Jenkins, 672 S.E.2d 759, 763 (N.C. App. Ct. 2009) (citing Sutton v. Messer, 620 S.E. 2d 19, 22 (N.C. App. Ct. 2005)).  Further, North Carolina courts will construe contracts “consistent with reason and common sense.”  Variety Wholesalers, Inc. v. Salem Logistics Traffic Services, LLC, 723 S.E.2d 744, 748 (N.C. 2012) (quoting Stephens Co. v. Lisk, 82 S.E.2d 99, 101 (N.C. 1954)).  However, if the language of the contract is ambiguous, however, it becomes a question of fact and the court may then consider extrinsic evidence.  Crider v. Jones Island Club, Inc., 554 S.E.2d 863, 866 (N.C. Ct. App. 2001).  “An ambiguity exists in a contract when either the meaning of words or the effect of provisions is uncertain or capable of several reasonable interpretations.”  Variety Wholesalers, 723 S.E.2d at 748 (N.C. 2012) (quoting Schenkel & Shultz, Inc. v. Hermon F. Fox & Assocs., 658 S.E.2d 918, 921 (N.C. 2008)).  After reviewing the ambiguities, where there is “no other reasonable, nonconflicting interpretation [] possible,” North Carolina courts will “construe ambiguities against the drafter – the party responsible for choosing the questionable language.” Gay v. Saber Healthcare Group, L.L.C., 842 S.E.2d 635, 640 (N.C. App. Ct. 2020) (quoting Novacare Orthotics & Prosthetics E., Inc. v. Speelman, 528 S.E.2d 918, 921 (N.C. App. Ct. 2000). 

Prompt Payment Requirements (Public/Private)

North Carolina Public – N.C. Gen. Stat § 143-134.1 (2022) (owner to prime per contract for progress payments; final payment within 45 days of acceptance or occupation of project, whichever is earlier; prime to sub/sub to lower tier within 7 days of payment; interest at 1% per month).

North Carolina Private – N.C. Gen. Stat. §§ 22C-1 to 22C-6 (2022) (no provision for owner; prime to sub/sub to lower tier 7 days after payment; interest at 1% per month).

False Claims Statute

N.C. Gen. Stat. Ann. §§ 1-605 to 1-618 – The purpose of North Carolina’s False Claims Act is to “deter persons from knowingly causing or assisting in causing the State to pay claims that are false or fraudulent and to provide remedies in the form of treble damages and civil penalties when money is obtained from the State by reason of a false or fraudulent claim.”  Id. § 1-605(b).  North Carolina law also imposes a civil penalty between $5,500 and $11,000 for each violation, plus treble damages sustained by the state, and costs of a civil action to recover any of those penalties or damages.  Id. § 1-607(a).  Similar to the FCA, the North Carolina Act permits a court to reduce the violator’s liability to not less than two times the amount of damage 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. § 1-607(b). 

Licensing Requirements for Construction Managers

North Carolina does not have an express licensure requirement for construction managers.  North Carolina law requires, however, that all general contractors obtain a license.  The definition of a general contractor is sufficiently broad to encompass the services most often provided by a construction manager.  North Carolina Statute § 87-1 defines a general contractor as “any person or firm or corporation who … undertakes to superintend or manage … the construction of any building … where the cost of the undertaking is thirty thousand dollars ($30,000) or more … .”  The statute makes an exception to land owned by that person provided that the building is intended solely for the occupancy by that person and his family, firm, or corporation after completion.  See id. § 87-1.  North Carolina’s administrative code further provides that anyone who “undertakes to superintend or manage” a construction project must be licensed as a general contractor, with the exception of a licensed architect or engineer who is “supervising the execution of design plans for the project owner and who does not contract directly with subcontractors to perform the construction for the project.”  21 N.C. Admin. Code § 12A.0208.  Additionally, providers of construction management at-risk services for public contracts are statutorily required to be licensed as a general contractor.  See N.C. Gen. Stat. Ann. § 143-128.1.

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