Enforceability of Limitation of Liability Clauses
Limitations of Liability
Tennessee courts recognize contractual limitations of liability. Trinity Indus., Inc. v. McKinnon Bridge Co., Inc., 77 S.W.3d 159, 171 (Tenn. Ct. App. 2001), abrogated on other grounds by Bowen ex rel. Doe v. Arnold, No. M2015-00762, 2016 WL 5491022 (Tenn. Sept. 29, 2016) (upholding provision in contract between general contractor and steel fabricator for bridge project which limited consequential damages for any failure of steel). Limitations of liability cannot shield a party from its own fraud. Gross v. McKenna, No. E2005-02488-COA-r3-cv, 2007 WL 3171155, at *5 (Tenn. Ct. App. Oct. 30, 2007) (finding that contractor could not rely on limitation of liability to defend against fraud claim). Bad faith terminations of a contract may void limitations of liability contained therein. Armouth Int’l, Inc. v. Dollar Gen. Corp., No. 3:14-cv-00567, 2016 WL 3098058, at *2 (M.D. Tenn. June 3, 2016) (finding that if defendant did not act in good faith in cancelling contract, temporal damages limitation would not apply). Parties to sales contracts may limit or modify remedies and warranties, absent unconscionability. Tenn. Code Ann. §§ 47-2-316, 47-2-719 (West 2021); see also Baptist Mem’l Hosp. v. Argo Constr. Corp., 308 S.W.3d 337, 344-45 (Tenn. Ct. App. 2009) (exclusive remedy provision in sales contract between general contractor and subcontractor precluded claim for indemnity).
In state contracts, the chief procurement officer must authorize limitations of liability in contracts for the procurement of goods and services. Tenn. Code Ann. § 12-3-701 (West 2021).
Tennessee courts recognize exculpatory clauses as long as they do not violate public policy. Copeland v. Healthsouth/Methodist Rehab. Hosp., LP, 565 S.W.3d 260 (Tenn. Dec. 20, 2018); Crawford v. Buckner, 839 S.W.2d 754, 756 (Tenn. 1992); Gibson v. YMCA of Middle Tenn., No. M2015-01465, 2016 WL 2937320 (Tenn. Ct. App. May 16, 2016) (“Exculpatory agreements . . . have long been enforceable in Tennessee.”). Tennessee courts consider the totality of circumstances in determining the enforceability of an exculpatory clause by weighing non-exhaustive factors such as “(1) relative bargaining power of the parties; (2) clarity of the exculpatory language, which should be clear, unambiguous, and unmistakable about what the party who signs the agreement is giving up; and (3) public policy and public interest implications.” Copeland v. Healthsouth/Methodist Rehab. Hosp., LP, 565 S.W. 260, 274 (Tenn. 2018). These factors are not weighed equally and rather, analysis is given in balancing these considerations given the specific facts and circulations of the case. Id.
“No damages for delay” clauses are also enforceable unless the contractor can demonstrate that the delay: (1) was not contemplated by the parties; (2) amounted to an abandonment of the contract; (3) was caused by bad faith; or (4) was caused by active interference. Thomas & Assocs., Inc. v. Metro. Gov’t of Nashville, No. M2001-00757-COA-R3-CV, 2003 WL 21302974, at *14 (Tenn. Ct. App. June 6, 2003).
Exculpatory clauses are unenforceable if they relieve a party from willful or gross negligence. Perez v. McConkey, 872 S.W.2d 897, 904 (Tenn. 1994).
Tenn. Code Ann. § 62-6-123 (West 2021) invalidates any indemnification provision in a construction contract that purports to indemnify or hold harmless the promisee for injury or damage caused by or resulting from the promisee’s sole negligence. Because the statute only prohibits agreements that indemnify a party for its “sole negligence,” parties may presumably use indemnity agreements that indemnify the indemnitee for the concurrent negligence of the indemnitor and indemnitee. Plumlee v. LGM Eng’rs Contractors, No. 779, 1987 WL 16351, at *3 (Tenn. Ct. App. Sept. 1, 1987) (upholding indemnity provision in construction contract permitting concurrent negligence between indemnitor and indemnitee, although court did not cite state anti-indemnity statute in its analysis).
In Rentenbach Constructors, Inc. v. Bowen, No. E2000-1213-COA-r3-CV, 2000 WL 1690286 (Nov. 13, 2000), the court found that the parties failed to contract around the anti-indemnity statute when using the phrase “sole gross negligence” since the phrase suggested that the indemnity agreement still covered sole simple negligence. Id. at 3. Tennessee courts have applied this statute not only to agreements between owners and prime contractors, but also to “any contract relating to the construction, alteration, repair, or maintenance of a building.” Cincinnati, New Orleans & Tex. Pac. Ry. Co. v. C & P Mgmt., Inc., 65 F.3d 168, at *3 (6th Cir. 1995) (Table) (citing Elliot Crane Serv., Inc. v. H.G. Hill Stores, Inc., 840 S.W.2d 376, 379-80 (Tenn. Ct. App. 1992)) (applying statute to crane rental agreement); Carroum v. Dover Elevator Co., 806 S.W.2d 777, 779-80 (Tenn. Ct. App. 1990)).
The mere existence of insurance coverage is not enough to save an indemnity provision under Section 62-6-123. For example, in Armoneit v. Elliott Crane Serv., Inc., 65 S.W.3d 623 (Tenn. Ct. App. 2001), the Court of Appeals of Tennessee rejected a contractor’s claim that its liability insurance would remove the indemnity provision from the state’s anti-indemnity statute. The court found that it “is impossible to predict whether [the contractor’s] insurance will cover the damages for [its] sole negligence in any given case.” Id. at 631-32.
Section 62-6-123 does not apply to avoid insurance contracts. Am. Guarantee & Liab. Ins. Co. v. Norfolk S. Ry. Co., 278 F. Supp.3d 1025, 1047 (E.D. Tenn. 2017).
Enforceability of Waiver of Consequential Damages Clauses
Tennessee courts enforce contractual waivers of consequential damages in the construction context, provided such waivers are not unconscionable. In Construction Enterprises, Inc. v. Waterstone at Panama City Apartments, LLC, No. 10-00711, 2011 WL 4431824 (M.D. Tenn. Sept. 22, 2011), the court denied a motion to dismiss because, in part, it was unclear from the language of the mutual waiver of consequential damages provision in the construction contract whether the fees and remediation costs sought by the non-moving party were “envisioned by the parties as waived by the consequential damages clause.” Id. at *2. Thus, the Waterstone court implicitly recognized the enforceability of the consequential damages waiver clause. See id.; see also Shepherd v. Weather Shield Mfg., Inc., No. W1999-00508-COA-R3-CV, 2000 WL 34411064, at *6 (Tenn. Ct. App. Aug. 21, 2000) (enforcing exclusion of consequential damages provision in a housing construction contract where the provision was not unconscionable). Further, in other contexts, Tennessee courts have enforced contractual limitations of liability and exculpatory clauses unless they violated public policy. See, e.g., Houghland v. Sec. Alarms & Servs., Inc., 755 S.W.2d 769, 773 (Tenn. 1988) (enforcing provisions limiting liability in alarm service contracts and noting that “[l]imitations against liability for negligence or breach of contract have generally been upheld in this state in the absence of fraud or overreaching”); Olson v. Molzen, 558 S.W.2d 429, 431–32 (Tenn. 1977) (holding that an “exculpatory contract signed by a patient as a condition of receiving medical treatment is invalid as contrary to public policy”). Generally, under Tennessee law, the “rights and obligations of contracting parties are governed by their written agreements.” See Vanderbilt Univ. v. DiNardo, 174 F.3d 751, 758 (6th Cir. 1999). Consistent with parties’ freedom to make their own bargains, they are free to allocate liability provided that such clauses do not violate public policy. Planters Gin Co. v. Fed. Compress & Warehouse Co., 78 S.W.3d 885, 892 (Tenn. 2002).
In the context of transactions for the sale of goods, the Tennessee Uniform Commercial Code allows a buyer to recover consequential damages from the seller under appropriate circumstances. See Tenn. Code Ann. §§ 47-2-711 – 47-2-714, 47-2-715(2). However, Tennessee code section 47-2-719 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. A limited remedy will not fail of its essential purpose where the remaining remedy is “fair and adequate.” See Arcata Graphics Co. v. Heidelberg Harris, Inc., 874 S.W.2d 15, 29 (Tenn. Ct. App. 1993) (holding that a remedy limited to the refund of the purchase price did not fail of its essential purpose). Moreover, a mere “finding that a warranty failed of its essential purpose would not automatically waive a consequential damages exclusion.” Aquascene, Inc. v. Noritsu Am. Corp., 831 F. Supp. 602, 604 (M.D. Tenn. 1993). Unconscionability must also be present, requiring a finding that the “inequality of the bargain is so manifest as to shock the judgment of a person of common sense,” and that “the terms are so repressive that no reasonable person would make them on the one hand, and no honest and fair person would accept them on the other.” Id. at 605 (quoting Haun v. King, 690 S.W.2d 869, 872 (Tenn. Ct. App. 1984)). Although Tennessee courts apply the UCC’s waiver of consequential damages provisions to sales of goods for the purposes of construction, see, e.g., Johnson v. Volvo Truck Corp., No. 07-cv-277, 2008 WL 4982450, at *4 (E.D. Tenn. Nov. 19, 2008), Article 2 of the UCC does not apply to service contracts, including contracts for construction.
Application of Economic Loss Doctrine
Tennessee has adopted the economic loss doctrine. See, e.g., City of Morristown v. AT&T Corp., No. 2:16-CV-59, 2016 WL 4530499, at *4 (E.D. Tenn. Aug. 29, 2016) (citing John Martin Co. v. Morse/Diesel, Inc., 819 S.W.2d 428, 430 (Tenn. 1991)); Ritter v. Custom Chemicides, Inc., 912 S.W.2d 128, 133 (Tenn. 1995) (“Tennessee has joined those jurisdictions which hold that product liability claims resulting in pure economic loss can be better resolved on theories other than negligence.”); United Textile Workers of Am., AFL-CIO v. Lear Siegler Seating Corp., 825 S.W.2d 83, 87 (Tenn. Ct. App. 1990) (recognizing the validity of the doctrine). The economic loss rule does not apply where the parties have privity of contract. City of Morristown, 2016 WL 4530499, at *4.
In the construction context, when defective work damages persons or property other than the work itself, tort claims are available consistent with the economic loss doctrine. Tennessee courts also permit tort actions against contractors for “negligent construction,” even when the damage alleged is only to the work that is the subject of the construction contract, and not to persons or other property. See Dulaney v. Don Walker Constr., 2014 WL 3763635, at *7 (Tenn. Ct. App. July 30, 2014). Tennessee courts make no practical distinction between “negligent construction” and breach of contract and apply contract law when determining negligent performance under a construction contract. See, e.g., Forrest Constr. Co. v. Laughlin, 337 S.W.3d 211, 228–33 (Tenn. Ct. App. 2009) (analyzing negligent construction claim under contract principles); see also Hinsen v. Meadors, No. 01-A-01-9811-CH-00583, 1999 WL 675129, at *2-4 (Tenn. Ct. App. Sept. 1, 1999) (upholding the trial court’s finding that “failure to perform work in a workman-like fashion” under a contract may be brought as a tort claim). Courts measure damages for negligent construction in the same way as a calculation for contractual breach. See, e.g., Forrest Constr. Co., 337 S.W.3d at 232–33 (measure of damages for negligent construction is “reasonable cost of the required repairs).
Limited Exception for Negligent Supervision or Negligent Misrepresentation
Tennessee has also recognized exceptions to its economic loss rule, even in the absence of privity, in certain cases of negligent supervision or negligent misrepresentation. Acuity v. McGhee Eng’g, Inc., 297 S.W.3d 718, 734 (Tenn. Ct. App. 2008) (citing John Martin Co., 819 S.W.2d at 435 (Tenn.1991)); see also City of Morristown, 2016 WL 4530499, at *4. However, a recent Court of Appeals of Tennessee decision holds that this exception only applies outside the products liability context and that the doctrine bars negligent misrepresentation claims in products liability cases. City of Franklin v. W.L. Hailey & Co., Inc., No. M2018-01535-COA-R3-CV, 2019 WL 5607796, at *15–*16 (Tenn. Ct. App. Oct. 30, 2019).
In 2021, the Supreme Court of Tennessee declined to announce a broad rule either extending the economic loss rule to all fraud claims or exempting all fraud claims from the rule. See Milan Supply Cain Solutions Inc. v. Navistar Inc., 627 W.3d 125, 153 (Tenn. 2021). Instead, the court held that “for situations […] involving a contract between sophisticated commercial business entities and a fraudulent inducement claim seeking recovery of economic losses only, the economic loss doctrine applies if the only misrepresentation[s] by the dishonest party concern[ ] the quality or character of the goods sold. Under such circumstances, the other party is still free to negotiate warranty and other terms to account for possible defects in the goods.” See id. at 153-54 (Tenn. 2021) (internal citations omitted).
Enforceability of No Damages for Delay Clauses
Tennessee courts generally enforce no damages for delay clauses, even if “the result is harsh” or if the clause “later prove[s] to be burdensome or unwise.” Haren Constr. Co., Inc. v. Metro. Gov’t., No. M2002-01135-COA-R3-CV, 2003 WL 21537623, at *6 (Tenn. Ct. App. July 9, 2003); see also Brown Bros., Inc. v. Metro. Gov’t., 877 S.W.2d 745, 749 (Tenn. Ct. App. 1993) (referring generally to exceptions adopted by courts in other jurisdictions, including: (1) delays not contemplated by the parties; (2) delays amounting to abandonment of the contract; (3) delays caused by bad faith; or (4) delays caused by active interference, but finding that none of the exceptions applied to the facts at issue).
Strict Interpretation of Contract
In Tennessee, the goal of contractual interpretation is to determine the intent of the parties based on the usual, natural, and ordinary meaning of the contract’s language. Planters Gin Co. v. Fed. Compress & Warehouse Co., 78 S.W.3d 885, 889-90 (Tenn. 2002). Tennessee courts will “initially determine the parties’ intent by examining the plain and ordinary meaning of the written words that are ‘contained in the four corners of the contract.’” Dick Broad. Co., Inc. of Tennessee v. Oak Ridge FM, Inc., 395 S.W.3d 653, 659 (Tenn. 2013) (quoting 84 Lumbar Co. v. Smith, 456 S.W.2d 380, 383 (Tenn. 2011). Additionally, the court may look to the business to which the contract relates as well as the construction placed on the contract by the parties during performance. Simonton v. Huff, 60 S.W.3d 820, 825 (Tenn. Ct. App. 2000). Thus, Tennessee courts ordinarily go slightly beyond the four corners of the contract when determining its meaning. If the contract language is clear and unambiguous, it will control, however, if the terms are ambiguous, Tennessee courts will apply alternative contract interpretation principles and admit parol evidence. Dick Broad Co., 395 S.W.3d at 659; see also Ingram v. Earthman, 993 S.W.2d 611, 641 (Tenn. Ct. App. 1998). A contract is ambiguous when it is of uncertain meaning and may fairly be understood in more than one way. Planters Gin Co. v. Fed. Compress & Warehouse Co., Inc., 78 S.W.3d 885, 890 (Tenn. 2002) (quoting Empress Health & beauty Spa, Inc. v. Turner, 503 S.W.2d 188, 190-91 (Tenn. 1973)). While Tennessee courts will generally construe ambiguous terms against the drafter, “the courts will not rewrite an unambiguous term simply to avoid harsh results.” Ralph v. Pipkin, 183 S.W.3d 362, 367 (Tenn. Ct. App. 2005) (citing Certain Underwriter’s of Lloyd’s of London v. Transcarriers, Inc., 107 S.W.3d 496, 499 (Tenn. Ct. App. 2002)).
Prompt Payment Requirements (Public/Private)
Tennessee Public – Tenn. Code Ann. §§ 12-4-701 to 12-4-707 (West 2022) – Owner to prime 45 days after invoice unless otherwise agreed; prime to sub 30 days after payment; sub to lower tier 30 days of invoice and in accordance with contract but subject to pay if paid clause; interest at 1.5% per month.
Tennessee Private – Tenn. Code Ann. §§ 66-34-101 to 66-34-703 (2022) – The Prompt Pay Act of 1991 is applicable to all construction contracts, public and private. (Owner to prime/prime to sub/sub to lower tier within 30 days of invoice submitted and in accordance with contract schedule for progress payments; retainage released from owner to prime within 90 days of substantial completion or completion of the work, whichever occurs first; retainage released from prime to sub within 10 days of receipt from owner; retainage may not exceed 5% of contract; interest on late payments at 1.5% per month if not specified in contract; attorney’s fees available if nonpayment was in bad faith; where prime contract is $500,000 or greater, retainage on contract and subcontracts must be placed in interest-bearing escrow account; failure to pay retainage or where retainage exceeds 5% of the contract constitutes a Class A misdemeanor subject to a fine of $3,000; fines/penalties do not apply to public contracts; Prompt Pay Act inapplicable to certain financial institutions and construction/improvement of residences for four or fewer single-family units).
False Claims Statute
Tenn. Code Ann. §§ 4-18-101 to 4-18-108 – The Tennessee False Claims Act generally mirrors the FCA and applies to controversies involving $500 or more. Id. § 4-18-103. Tennessee’s Act also imposes liability upon those who benefit from an inadvertent submission of a false claim and fail to disclose this fact within a reasonable period of time after discovery. Id. § 4-18-103(a)(8). Tennessee’s Act also holds violators jointly and severally liable for any act committed by two or more persons. Id. § 4-18-103(c). The Tennessee Act imposes a civil penalty between $2,500 and $10,000 for each false claim, plus treble damages sustained by the state or political subdivision, as well as the state’s costs for bringing a civil action to recover the damages. Id. § 4-18-103(a). Tennessee law permits a court to award not less than two times and not more than three times the amount of damages sustained by the state or political subdivision 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 without knowledge of the investigation and before the commencement of criminal prosecution, civil action, or administrative action. Id. § 4-18-103(b).
Licensing Requirements for Construction Managers
Tennessee law requires contractors to be licensed. Tenn. Code Ann. § 62-6-103. The Tennessee licensing statute definition broadly defines “contractor” to include activities often performed by a construction manager. Id. § 62-6-102(4)(A)(i). Specifically, the term “contractor” is defined as “any person or entity who undertakes to, attempts to, or submits a price or bid or offers to construct, supervise, superintend, oversee, schedule, direct, or in any manner assume charge of the construction undertaking …” for which the total cost of the project is $25,000 or more. Id. § 62-6-102(4)(A)(i). Where the project exceeds $25,000, the statute specifically includes a “construction manager of any kind” in the definition of contractor. Thus, the statute effectively requires a construction manager to be a licensed contractor if the project cost exceeds $25,000. Tenn. Code Ann. § 62-6-102(4)(A)(iii).