Enforceability of Limitation of Liability Clauses
Author: Saloni Shah and Joanna Kopcyzk
Limitations of Liability
South Dakota courts generally permit contractual limitations of liability, although courts will evaluate the parties’ respective bargaining power. Rozeboom v. Nw. Bell Tel. Co., 358 N.W.2d 241, 245 (S.D. 1984) (finding liability limitation unenforceable and overly harsh because plaintiff did not have any bargaining power and limited plaintiff to the price paid for a Yellow Pages advertisement). Parties to sales contracts may limit or modify remedies and warranties, absent unconscionability. S.D. Codified Laws §§ 57a-2-316, 57a-2-719 (2021). Even if a remedy fails of its essential purpose, a buyer may not recover consequential damages if excluded by a limitation of remedy provision. Johnson v. John Deere Co., 306 N.W.2d 231, 238 (S.D. 1981) (refusing to award consequential damages even though repair and replacement warranty on tractor may have failed of its essential purpose).
South Dakota courts enforce exculpatory clauses unless contrary to public policy. Johnson v. Rapid City Softball Ass’n, 514 N.W.2d 693, 701 (S.D. 1994) (stating general principal that “anticipatory releases are neither unusual nor per se void as a matter of public policy” and “the more inherently dangerous or risk the recreational activity, the more likely that an anticipatory release will be held valid”); see also, Wimmer v. Top Gun Guide Service, Inc., 421 F. Supp. 3d 849, 855 (D.S.D. 2019) (“South Dakota case law has upheld the efficacy of broad waivers of liability”); Domson, Inc. v. Kadrmas Lee & Jackson, Inc., 918 N.W.2d 396 (S.D. 2018) (upholding exculpatory clause that insulated designers from liability to contractor arising out of good faith acts and failure to act). General exculpatory clauses disclaiming any responsibility for the accuracy of data are unenforceable when the government’s positive specifications were obviously intended to be used by the bidding contractors in formulating their bids. Morris, Inc. v. State ex rel. S.D. Dep’t of Transp., 589 N.W.2d 520, 523 (S.D. 1999).
S.D. Codified Laws § 56-3-18 (2021) invalidates provisions in construction contracts purporting to indemnify the promisee against liability for damages arising out of bodily injury to persons or property damage caused by the promisee’s sole negligence. Section 56-3-16 provides that construction contracts, plans, and specifications which contain indemnification provisions shall include the following provision: “The obligations of the contractor shall not extend to the liability of the architect or engineer, his agents or employees arising out of (1) the preparation or approval of maps, drawings, opinions, reports, surveys, change orders, designs or specifications, or (2) the giving of or the failure to give directions or instructions by the architect, or engineer, his agents or employees provided such giving or failure to give is the primary cause of the injury or damage.” See also Chicago & N.W. Transp. Co. v. V & R Sawmill, Inc., 501 F. Supp. 278, 282-83 (D.S.D. 1980) (finding indemnification clause in license agreement void under Section 56-3-18).
Enforceability of Waiver of Consequential Damages Clauses
South Dakota courts have not directly addressed the enforcement of contractual waivers of consequential damages in the construction or engineering context, but it appears that they may likely enforce such clauses because they have enforced contractual limitations of liability in other contexts. See, e.g., Golden Reward Mining Co. v. Jervis B. Webb Co., 772 F. Supp. 1118, 1122–24 (D.S.D. 1991) (upholding a waiver of consequential damages provision in a contract for sale of mining equipment between two large commercial entities that negotiated the agreement at arm’s length); Johnson v. John Deere Co., 306 N.W.2d 231, 236–38 (S.D. 1981) (enforcing exclusion of liability for consequential damages in contract for sale of tractor); but see Rozeboom v. Nw. Bell Tel. Co., 358 N.W.2d 241, 245 (S.D. 1984) (holding that a clause limiting liability to cost of advertisement constituted an unconscionable contract of adhesion between a public utility monopoly and a private citizen). Generally, South Dakota courts hold that, “[i]f the intention [of the contracting parties] is clearly manifested by the language of the agreement, it is the court’s duty to declare and enforce it.” E.g., Fuller v. Croston, 725 N.W.2d 600, 610 (S.D. 2006) (quoting Ziegler Furniture & Funeral Home, Inc. v. Cicmanec, 709 N.W.2d 350, 355 (S.D. 2006)).
In the context of transactions for the sale of goods, the South Dakota Uniform Commercial Code allows a buyer to recover consequential damages from the seller under appropriate circumstances. See S.D. Codified Laws §§ 57A-2-711 – 57A-2-714, 57A-2-715(2). However, South Dakota code section 57A-2-719 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. See Highmark, Inc. v. Nw. Pipe Co., No. Civ 10-5089, 2016 WL 4384673, at *3 (D.S.D. Aug. 16, 2016); Durham v. Ciba-Geigy Corp., 315 N.W.2d 696, 700 (S.D. 1982) (“One-sided agreements whereby one party is left without a remedy for another party’s breach are oppressive and should be declared unconscionable.”).
Application of Economic Loss Doctrine
South Dakota courts recognize the economic loss doctrine. City of Lennox v. Mitek Indus., Inc., 519 N.W.2d 330, 333 (S.D. 1994) (“The general rule is that economic losses are not recoverable under tort theories; rather, they are limited to the commercial theories found in the UCC.”); see also Diamond Surface v. State Cement Plant Comm’n, 583 N.W.2d 155, 160-62 (S.D. 1998) (“[P]urely economic interests are not entitled to protection against mere negligence. … [W]hen there is no accident and no physical harm so that the only loss is pecuniary/ a negligence action will not lie.”). In conformity with the general approach to the doctrine, South Dakota law recognizes exceptions “when personal injury is involved” or “when the damage is to ‘other property’ as opposed to the specific goods that were part of the transaction,” id. at n.5, or personal injury is involved. City of Lennox, 519 N.W.2d at 333.
South Dakota courts have also allowed for economic damages in cases of professional negligence even where there is no privity between the parties. Mid-W. Elec., Inc. v. DeWild Grant Reckert & Assocs. Co., 500 N.W.2d 250, 254 (S.D. 1993) (“We … recognize that in South Dakota a cause of action exists for economic damage for professional negligence beyond the strictures of privity of contract.”). In such cases the court applies a foreseeability test. Id. The Supreme Court also declined to extend any part of the doctrine to “professional services,” Kreisers Inc. v. First Dakota Title Ltd. P’ship, 852 N.W.2d 413, 421 (S.D. 2014).
Strict Interpretation of Contract
South Dakota courts strictly interpret contracts. The primary goal of contract interpretation is to give effect to the parties’ intent. Nelson v. Schellpfeffer, 656 N.W.2d 740, 743 (S.D. 2003). As such, South Dakota courts will look “to the language that the parties used in the contract to determine their intention,” and “examine the language of an agreement as w whole to determine the terms and conditions.” Edgar v. Mills, 892 N.W.2d 223, 230 (S.D. 2017) (quoting Poeppel v. Lester, 827 N.W.2d 580, 584 (S.D. 2013)). The court gives a reasonable meaning to the terms in the contract. Nelson, 656 N.W.2d at 744. When contract language is plain and unambiguous, South Dakota courts will interpret it and enforce it as written. Edgar, 892 N.W.2d at 231. In South Dakota, “[w]hen contract language is unambiguous, extrinsic evidence is not considered because the intent of the parties can be derived from within the four corners of the contract.” Vander Heide v. Boke Ranch, Inc., 736 N.W.2d 824, 835-36 (S.D. 2007). However, when the language is ambiguous, South Dakota courts may go beyond the four corners and look to extrinsic evidence to ascertain the intent of the parties. Id. at 836. South Dakota courts hold that a contract is ambiguous “when application of rules of interpretation leave a genuine uncertainty as to which of two or more meanings is correct,” and “when it is capable of more than one meaning when viewed objectively by a reasonably intelligent person who has examined the context of the entire integrated agreement.” Spiska Eng’g, Inc. v. SPM Thermo-Shield, Inc., 730 N.W.2d 638, 645 (S.D. 2007) (quoting Pesicka v. Pesicka, 618 N.W.2d 725, 727 (S.D. 2000) and Divich v. Divich, 640 N.W.2d 758, 761 (S.D. 2002)). While South Dakota courts follow the general principle of construing ambiguities against the drafter, this principle must be utilized in conjunction with South Dakota’s overarching contract interpretation principle of ascertaining and enforcing the parties’ intent. Vandyke v. Choi, 888 N.W.2d 557, 565 (S.D. 2016).
Prompt Payment Requirements (Public/Private)
South Dakota Public – S.D. Codified Laws §§ 5-26-1 to -26-8 (2022) (owner to prime within 45 days of invoice unless otherwise agreed; prime to sub 30 days after payment; interest at 1.5% or as agreed accruing beginning on 30th day after receipt of service and invoice).
South Dakota Private – N/A
False Claims Statute
Federal False Claims Act – 31 U.S.C. § 3729-3733 – Many states have enacted false claims statutes modeled on the federal False Claims Act (referenced as the “FCA” throughout this survey). 31 U.S.C. §§ 3729–3733. State analogues to the FCA aim to address claims involving state and local governments instead of the federal government. This summary identifies the FCA’s state analogues for construction claims. It does not address false claims statutes for other subjects, such as health care claims, applications for public assistance, or insurance claims.
The FCA defines “claim” as any request or demand for money or property where the government will provide or reimburse any portion of that money or property. Id. § 3729(b)(2). The FCA imposes civil liability for any of seven separate acts including: 1) knowingly presenting a false claim for payment; 2) knowingly making a false record or statement to obtain approval of a claim; 3) conspiring to obtain approval of a false claim; 4) knowingly delivering less than the amount of money or property owed to the government; 5) delivering a receipt for government property without knowledge of the receipt’s veracity and with intent to defraud; 6) knowingly purchasing or receiving public property from a government employee or member of the Armed Forces illegally; and 7) knowingly making or using a false record or statement to decrease a payment obligation to the government. Id. § 3729(a)(1).
A person found guilty of any of the above acts is liable to the government for: 1) a civil penalty between $5,000 and $10,000, as adjusted by inflation; 2) three times the amount of damage sustained by the government; and 3) the costs of a civil action brought to recover damages sustained by the government. Id. § 3729(a)(1-3). The FCA, however, allows mitigation of the penalty if the violator cooperates with the government’s investigation. Courts may reduce the violator’s liability to two times the amount of damage sustained by the government when the violator: 1) provides all of the information known about that violation to the investigative team within 30 days of gaining such knowledge; 2) provides the information without actual knowledge of the investigation and before the government files charges; and 3) fully cooperates with the government’s investigation. Id. § 3729(a)(2).
South Dakota – N/A
Licensing Requirements for Construction Managers
Although South Dakota requires contractors engaged in realty improvement to acquire an excise tax license from the state, the regulation of contractors is primarily controlled at the local level. S.D. Codified Laws § 9-33-6; § 9-34-12; see generally S.D.C.L. tit. 11. South Dakota requires certification/licensing only for asbestos abatement, electrical, and plumbing contractors, but does not have any specific provisions governing construction managers.