Enforceability of Limitation of Liability Clauses
Author: Saloni Shah and Joanna Kopcyzk
Limitations of Liability
Oregon courts will enforce a clause that clearly and unequivocally expresses an intent to limit a defendant’s liability for the consequences of its own negligence if the clause is conspicuous, clear, unequivocal, and not against public policy. Abraham v. T. Henry Constr., Inc., 249 P.3d 534, 540 (Or. 2011) (noting that parties may limit tort remedies by contractually limiting or specifying available remedies and, in the absence of such a provision, permitting homeowners to pursue negligence claim against contractor); Estey v. MacKenzie Eng’g Inc., 927 P.2d 86, 88-90 (Or. 1996) (refusing to enforce limitation of liability limiting negligence claims to contract sum in contract between home buyer and inspection firm because buyer might have interpreted “liability” to refer only to liability arising from breach of contract). If a limitation of liability clause provides a nominal remedy, the court may apply principles pertaining to exculpatory clauses when examining its validity. Id. at 89. Courts are likely to uphold both limitations of liability and exculpatory clauses when they are a “part of a bargain in fact between business concerns that have dealt with one another at arm’s length in a commercial setting,” and when the provisions are conspicuous. Atlas Mut. Ins. Co. v. Moore Dry Kiln Co., 589 P.2d 1134, 1135 (Or. Ct. App. 1979); Kaste v. Land O’Lakes Purina Feed, LLC, 392 P.3d 805, 813-14 (Or. Ct. App. 2017).
Parties to sales contracts may modify or limit remedies and warranties. Or. Rev. Stat. Ann. §§ 72.3160, 72.7190 (West 2021). When determining whether the remedy has failed its essential purpose, courts determine the essential purpose at the time of contract formation and do not analyze whether the remedy was wise, fair, or oppressive. Tokyo Ohka Am., Inc. v. Huntsman Propylene Oxide LLC, No. 3:13-cv-01580, 2014 WL 3893031, at *7 (D. Or. Aug. 8, 2014).
Oregon law disfavors exculpatory clauses, but courts uphold them depending on the “subject and terms of the agreement and the relationship of the parties.” K-Lines, Inc. v. Roberts Motor Co., 541 P.2d 1378, 1382 (Or. 1975) (en banc) (upholding exculpatory clause where contract set forth that the “foregoing shall be Buyer’s sole and exclusive remedy whether in contract, ort or otherwise”). In examining the enforceability of an exculpatory clause, courts look at whether the clause was conspicuous and unambiguous, whether there was a substantial disparity in the parties’ bargaining power, whether the contract was offered on a take-it-or-leave-it basis, and whether the contract involved a consumer transaction. Bagley v. Mt. Bachelor, Inc., 340 P.3d 27, 38 (Or. Dec. 18, 2014) (en banc). Courts also analyze substantive considerations, including whether the enforcement of the clause would create a harsh or inequitable result, whether the clause serves an important public interest or function, and whether the clause purports to disclaim liability for more serious misconduct than ordinary negligence. Id.
Or. Rev. Stat. Ann.§ 30.140(1) (West 2021) invalidates any provision in a construction contract that requires a person to indemnify another against liability for damage arising out of death or bodily injury or property damage caused in whole or in part by the indemnitee’s negligence. This statute does not prohibit a provision in a construction contract that requires a person to indemnify another against liability if the loss arises from the indemnitor’s fault. Id. § 30.140(2). The terms of the statute extend to insurance. Accordingly, a subcontractor’s insurer is not required to provide coverage under an additional-insured endorsement so as to provide coverage for a general contractor—an indemnitee—for the indemnitee’s own negligence. Sec. Nat’l Ins. Co. v. Sunset Presbyterian Church, No. A156062, 2017 WL 6336460, at *4 (Or. Ct. App. Dec. 6, 2017). Oregon law also voids provisions in construction contracts that require a party to waive a right of subrogation, indemnity, or contribution for amounts paid by reason of death or bodily injury, or property damage, caused in whole or in part by another person’s negligence. Id. § 30.145(1).
Enforceability of Waiver of Consequential Damages Clauses
Oregon courts have directly addressed the enforcement of contractual waivers of consequential damages in the construction context. The U.S. District Court for the District of Oregon upheld a waiver of consequential damages provision in a construction contract in Black & Veatch Constr., Inc. v. JH Kelly, LLC, No. 09-1163, 2011 WL 1706223, at *4–5 (D. Or. May 5, 2011); see also J. Lilly, LLC v. Clearspan Fabric Structures Int’l, Inc., No. 18-cv-1104, 2020 WL 1855190, at *2 (D. Or. Apr. 13, 2020).
Generally, Oregon courts recognize that “parties are free to contract as they please, unless [permitting] them to do so would contravene the public interest.” Irish & Swartz Stores v. First Nat’l Bank of Eugene, 349 P.2d 814, 821 (Or. 1960), overruled on other grounds by 557 P.2d 654 (Or. 1976). Moreover, a “limitation of liability provision is enforceable under Oregon law if the provision (1) was bargained for; (2) was called to the other party’s attention; or (3) is conspicuous.” J. Lilly, 2020 WL 1855190, at *4.
In the context of transactions for the sale of goods, the Oregon Uniform Commercial Code allows a buyer to recover consequential damages from the seller under appropriate circumstances. See Or. Rev. Stat. Ann. §§ 72.7110 – 72.7140, 72.7150(2). However, Oregon code section 72.7190 permits the buyer and seller to contract to limit or exclude consequential damages unless the limitation or exclusion is unconscionable or where the circumstances cause a contractually specified limited or exclusive remedy to fail of its essential purpose.
Application of Economic Loss Doctrine
Oregon courts recognize the economic loss rule and have adopted the “intermediate approach” to the doctrine, which bars tort recovery for purely economic losses except in situations of danger to persons or property. See Hale v. Groce, 744 P.2d 1289, 1290 (Or. 1987) (“[O]ne ordinarily is not liable for negligently causing a stranger’s purely economic loss without injuring his person or property.” ); see also Becker v. Barbur Blvd. Equip. Rentals, Inc., 726 P.2d 967, 972 (Or. Ct. App. 1986), opinion adhered to as modified on reconsideration, 733 P.2d 900 (Or. 1987). Even in cases of “dangerously defective” products, the seller “is not necessarily liable for any and all losses consequent upon its use.” Becker, 726 P.2d at 972 (citing Russell v. Ford Motor Co., 575 P.2d 1383, 1387 (Or. 1978)). “The loss must be a consequence of the kind of danger and occur under the kind of circumstances, accidental or not, that made the condition of the product a basis for strict liability.” Id.
Special Relationship Exception
Oregon recognizes an exception to the doctrine for purely economic losses in cases where a “special relationship” exists. See Paul v. Providence Health Sys.-Or., 273 P.3d 106, 108-09 (Or. 2012); Gibson v. Bankofier, 365 P.3d 568, 582 (Or. Ct. App. 2015) (“Economic losses are only recoverable if they are caused by a defendant who has a special relationship with a plaintiff.”); cf. Harris v. Suniga, 180 P.3d 12, 16 (Or. 2008). To satisfy this special relationship requirement, “a plaintiff would have to show ‘[s]ome source of a duty outside the common law of negligence,’ such as a special relationship or status that imposed a duty on the defendant beyond the common-law negligence standard.” Harris, 180 P.3d at 15-16 (citations omitted). The Court of Appeals of Oregon has stated that “[a] special relationship exists when: (1) one party relinquishes over matters, usually financial, and entrusts them to the other party; (2) the party with special control is authorized to exercise independent judgment; (3) in order to further the other party’s interest; and (4) the relationship either is, or resembles, other relationships in which the law imposes a duty on parties to conduct themselves reasonably, so as to protect the other parties to the relationship.” Bell v. Public Employees Retirement Bd., 326, 247 P.3d 319 (Or. App. 2010).
In 1979, the Supreme Court of Oregon permitted a negligence claim by subsequent purchasers of a home against the builder despite the lack of privity, though the Court did not reference to the economic loss rule specifically. Newman v. Tualatin Development Co., Inc., 597 P.2d 800, 802-03 (Or. 1979). The Supreme Court affirmed in Harris, however, that non-privity owners could bring property damage claims in tort regardless of the economic loss rule. Harris, 180 P.3d at 17–18. Notably, the Court in Harris stated that such property damage claims could be brought even in the absence of a special relationship between the parties. Id. In 2019, the Court of Appeals of Oregon reversed the grant of a motion to dismiss a homeowner’s claim against a contractor for negligent replacement of drywall where the alleged injury was “physical damage to building components” resulting from undiscovered water damage. Lansing v. John Does 1–5, No. A16429, 2019 WL 6336957, at **3–**4 (Or. Ct. App. Nov. 27, 2019).
Enforceability of No Damages for Delay Clauses
Pursuant to Or. Rev. Stat. § 279C.315(1), “Any clause in a public improvement contract that purports to waive, release or extinguish the rights of a contractor to damages or an equitable adjustment arising out of unreasonable delay in performing the contract, if the delay is caused by acts or omissions of the contracting agency or persons acting therefor, is against public policy and is void and unenforceable.”
Oregon courts have not addressed the enforceability of no damages for delay clauses in private construction contracts.
Strict Interpretation of Contract
Oregon courts will strictly interpret contracts, and if the terms of a contract are unambiguous, the contract will be enforced according to its terms. Ristau v. Wescold, Inc., 868 P.2d 1331, 1333-34 (Or. 1994). Thus, if the contract is unambiguous, it is construed as a matter of law. Yogman v. Parrott, 937 P.2d 1019, 1021 (Or. 1997) (quoting Eagle Industries, Inc. v. Thompson, 900 P.2d 475, 479 (Or. 1995)); see also Couch Investments, LLC v. Peverieri, 371 P.3d 1202, 1206 (Or. 2016). A contract provision is legally ambiguous “if its wording can, in context, reasonably be given more than one plausible interpretation.” Williams v. RJ Reynolds Tobacco Co., 271 P.3d 103, 109 (Or. 2011 ) (citing Pacific First Bank v. New Morgan Park Corp., 876 P.2d 761, 764 (Or. 1994)). In deciding whether an ambiguity exists, the Oregon courts are not limited to mere text and context but may consider parol and other evidence. Abercrombie v. Hayden Corp., 883 P.2d 845, 852-53 (Or. 1994). Likewise, if the contract is ambiguous, the trier of fact may consider other evidence of the parties’ intentions and construe the language of the agreement accordingly. Anderson v. Divito, 908 P.2d 315 (Or. 1995). If the contract remains ambiguous after examination of any extrinsic evidence, we apply appropriate maxims of contract construction. Gemstone Builders, Inc. v. Stutz, 261 P.3d 64, 67 (Or. App. Ct. 2011) (citing Yogman, 937 P.2d at 1022). One such maxim of contract construction that Oregon courts follow is that when ambiguity exists as to the parties’ intent on specific terms after all other methods have been exhausted, Oregon courts will resort to the maxim of construing the remaining ambiguous terms against the drafter. Hoffman Const. Co. of Alaska v. Fred S. James & Co. of Oregon, 836 P.2d 703, 706-07 (Or. 1992).
Prompt Payment Requirements (Public/Private)
Oregon Public – Or. Rev. Stat. §§ 279C.320, .505, .515, .570, .580 (2022) (owner to pay prime within 30 days of invoice or within 15 days after payment is approved by contracting agency, whichever is earlier; interest at 3 times the discount rate on 90-day commercial paper in effect at Federal Reserve Bank in the Federal Reserve district that includes Oregon not to exceed 30%; owner to pay interest at 1.5% per month on final payment to prime to commence 30 days after contract work is completed; prime to sub/sub to lower tier within 10 days from payment; interest at 9% per annum if not made within 30 days of receipt of payment from owner).
Oregon Private – Or. Rev. Stat. §§ 701.625, .630 (2022) (owner makes progress payments to prime within 14 days of receipt of invoice and final payment within 7 days after owner approval of the work, unless otherwise agreed; prime makes progress payments to sub within 7 days of receipt of payment from owner and subcontractor to make payment to sub-subcontractor within 7 days of the subcontractor’s receipt of payment; interest at 1.5% per month unless otherwise agreed; attorneys’ fees for prevailing party).
False Claims Statute
Or. Rev. Stat. Ann. §§ 180.750-180.785 – The Oregon False Claims Act largely mirrors the FCA. Additionally, Oregon’s Act imposes liability on a person for failing to disclose a false claim that benefits that person within a reasonable time after discovering that the false claim has been presented or submitted for payment or approval. Id. § 180.755(1)(i). The Oregon Act states that a person has knowledge of a false claim if that person: 1) has actual knowledge of the false nature of the claim; 2) acts in deliberate ignorance of the false nature of the claim; or 3) acts in reckless disregard of the false nature of the claim. Id. § 180.755(2). Further, Oregon law provides that in a civil action brought by the Attorney General against a person who violates this statute, the Attorney General need not show that a person acted with intent to defraud a public agency to establish that the person acted with knowledge that a claim was false. Id. § 180.755(3).
Oregon’s Act imposes the greater of $10,000 or twice the amount of damages as a penalty for each violation, plus all the state’s damages. Id. § 180.760(4). A court may assess separate penalties to both an individual violator and a legal entity in violation of Oregon’s Act. Id. § 180.760(5). Oregon law permits a court to award no penalty when 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 before the commencement of an investigation, court proceeding, or administrative action. Id. § 180.760(6).
Licensing Requirements for Construction Managers
Oregon’s Construction Contractors Licensing Act requires anyone who works for compensation (except bona fide employees) in any construction activity involving improvements to real property to be licensed with the Oregon Construction Contractors Board (CCB), including any individual or entity that undertakes to do work as a contractor. Or. Rev. Stat. §§ 701.002 to 701.010. Construction managers are among those required to obtain a contractor’s license under Oregon law. Oregon Revised Statutes § 701.005 includes in the definition of contractor “[a] person that, for compensation or with the intent to sell, arranges or undertakes or offers to undertake or submits a bid to construct, alter, repair, add to, subtract from, improve, inspect, move, wreck or demolish, for another, a building, highway, road, railroad, excavation or other structure, project, development or improvement attached to real estate, or to do any part thereof.” Certain of the foregoing activities and/or services may also fall within the scope of construction management services. Furthermore, the Oregon Administrative Rules Compilation provides that “work as a contractor” as used in Section 701.021 of the Oregon Statute includes “construction management.” Or. Admin. R. 812-002-0760(3).
Additionally, the Oregon Administrative Rules define “construction management” as “the coordinating of a construction project, including, but not limited to, selecting contractors to perform work on the project, obtaining permits, scheduling specialty contractors’ work, and purchasing materials,” but that “‘[c]onstruction management’ does not include consulting work performed by a registered engineer or a licensed architect when operating as provided by ORS 701.010(8).” Or. Admin. R. 812-002-0160.