Enforceability of Limitation of Liability Clauses
Author: Saloni Shah and Joanna Kopcyzk
Limitation of Liability
Washington courts generally recognize limitations of liability and permit parties to allocate risk as they see fit. In Berschauer/Phillips Constr. Co. v. Seattle Sch. Dist. No. 1, 881 P.2d 986 (Wash. 1994) (en banc), the Supreme Court of Washington recognized the importance of holding parties to their contracts in the construction industry, “for it is in this industry that we see most clearly the importance of the precise allocation of risk as secured by contract.” Id. at 992. In Assurance Co. of Am. v. Premium Constr. Grp., Inc., No. 11-1662, 2012 WL 1292420 (W.D. Wash. Apr. 16, 2012), the court addressed a limitation of liability provision in a contract between a developer and a utilities contractor which specifically excluded the contractor’s liability for incidental, special, indirect or consequential damages. Id. at *1. During its work on the project, the contractor blocked drain lines from the retaining walls, causing water to displace the walls and requiring their repair. Id. The court found that the cost of repairing damage to the project’s retaining walls was a general damage, and therefore not covered by the limitation of liability. Id. at *2-3.
Parties to sales contracts may also limit or modify remedies and warranties, absent unconscionability. Wash. Rev. Code Ann. §§ 62a.2-316, 62a.2-719 (West 2022). If a remedy fails of its essential purpose, a buyer may recover consequential damages. See Milgard Tempering, Inc. v. Selas Corp. of Am., 902 F.2d 703, 709 (9th Cir. 1990) (finding that glass tempering furnace seller’s failure to repair furnace after two and one-half years made contractual repair remedy ineffective and invalidated contractual consequential damages exclusion).
Washington courts recognize exculpatory clauses, although they are strictly construed against the party seeking to benefit. See 1515–1519 Lakeview Boulevard Condo. Ass’n v. Apartment Sales Corp., 43 P.3d 1233, 1237 (Wash. 2002) (en banc) (holding that exculpatory covenant between government and developers was bargained-for and not overly broad); United Emp’rs Ins. Co. v. Mentor, No. 35237-7-I, 1996 WL 509559, at *4-5 (Wash. Ct. App. 1996) (stating that “the law disfavors promises not to sue in the future”). Exculpatory clauses must be conspicuous and unequivocal. Eastwood v. Horse Harbor Found., Ind., 241 P.3d 1256, 1264 n.3 (Wash. 2010) (en banc); Markel Am. Ins. Co. v. Dagmar’s Marina, L.L.C., 161 P.3d 1029, 1032 (Wash. Ct. App. 2007) (finding that provision in lease between marina and boat owner which provided that marina “shall not be liable or responsible in any manner for its safekeeping” did not unequivocally exculpate marina from its own negligence). Washington courts consider six non-exhaustive factors when evaluating exculpatory clauses. Jennings v. Brinks Home Sec., Inc., No. 22957-9-II, 1999 WL 615058, at *3 (Wash. Ct. App. Aug. 13, 1999).
While the unconscionability of an exculpatory clause is normally determined in light of the surrounding circumstances, in the commercial context, a party seeking to enforce an exculpatory clause “may prove the clause is conscionable regardless of the surrounding circumstances if the general commercial setting indicates a prior course of dealing or reasonable usage of trade as to the exclusionary clause.” Am. Nursery Prods., Inc. v. Indian Wells Orchards, 797 P.2d 477, 481 (Wash. 1990) (en banc).
Washington law invalidates provisions in construction contracts that indemnify against liability for damages caused by the indemnitee’s sole negligence. Wash. Rev. Code Ann. § 4.24.115(a)-(b) (West 2022). However, provisions in construction contracts that indemnify against liability for damages caused by the concurrent negligence of the indemnitee and indemnitor are valid (1) to the extent of the indemnitor’s negligence; and (2) only if the agreement specifically and expressly provides therefor. Accordingly, a subcontractor may only indemnify a general contractor to the extent of the subcontractor’s negligence. Millican v. N.A. Degerstrom, Inc., 313 P.3d 1215, 1221 (Wash. Ct. App 2013). To be enforceable, the indemnity agreement need not mention concurrent negligence so long as it clearly states that the subcontractor will be liable for “all liability.” McDowell v. Austin Co., 710 P.2d 192, 195 (Wash. 1985) (en banc).
Enforceability of Waiver of Consequential Damages Clauses
Washington courts have not directly addressed the enforcement of contractual waivers of consequential damages in the construction context, but it appears that they may likely enforce such clauses because they have enforced contractual limitations of liability in other contexts. See URS Corp. v. Transpo Grp., Inc., No. C14-00860, 2015 WL 419021, at *4 (W.D. Wash. Jan. 30, 2015) (holding waiver of consequential damages provision flowed down from the prime contract to lower-tier contracts); M.A. Mortenson Co. v. Timberline Software Corp., 998 P.2d 305, 314–16 (Wash. 2000) (enforcing exclusion of consequential damages clause in a “shrinkwrap license” for the purchase of computer software used by contractor in preparing construction bids where the contractor subsequently found that the bid was $1.95 million less than it should have been); see also W. Nat’l Assurance Co. v. Shelcon Constr. Grp., LLC, 332 P.3d 986, 990 (Wash. Ct. App. 2014) (enforcing exclusion of consequential damages in a Commercial General Liability policy insuring general contractor in a suit alleging defective workmanship in connection with development of a housing subdivision).
Generally, Washington courts recognize limitations of liability and permit parties to allocate risks as they see fit. In Berschauer/Phillips Construction Co. v. Seattle School District No. 1, 881 P.2d 986 (Wash. 1994), the Supreme Court of Washington recognized the importance of holding parties to their contracts, particularly in the construction industry, “for it is in this industry that we see most clearly the importance of the precise allocation of risk as secured by contract.” Id. at 992. Washington courts have held that, as with all contractual provisions, an agreed-upon remedies limitation clause is enforceable because it is axiomatic that parties to a contract must be bound by its terms. See Torgerson v. One Lincoln Tower, LLC, 210 P.3d 318, 322 (Wash. 2009). Generally, “exclusionary clauses” are prima facie conscionable, at least in purely commercial contracts. Am. Nursery Prods. v. Indian Wells Orchards, 797 P.2d 477, 481 (Wash. 1990); see Puget Sound Fin. L.L.C. v. Unisearch, Inc., 47 P.3d 940, 944–45, 948 (Wash. 2002) (noting that “liability limitations will not be enforceable if they are unconscionable,” but finding that the “totality of the circumstances support the conscionability and enforceability of the liability limitation clause”). However, exculpatory clauses will be strictly construed by the courts. Scott ex rel. Scott v. Pac. W. Mountain Resort, 834 P.2d 6, 9 (Wash. 1992) (“Exculpatory clauses are strictly construed and must be clear if the exemption from liability is to be enforced.”).
In the context of commercial contracts for the sale of goods, the Washington Uniform Commercial Code allows a buyer to recover consequential damages from the seller under appropriate circumstances. See Wash. Rev. Code Ann. §§ 62A.2-711 – 62A.2-714, 62A.2-715(2). However, Washington code section 62A.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. Washington has adopted certain further limitations on provisions that attempt to limit consequential damages in the context of goods “purchased primarily for personal, family or household use.” Wash. Rev. Code Ann. § 62A.2-719(3).
Application of Economic Loss Doctrine
The Washington legislature has codified its economic loss rule as it applies to products liability, specifically barring recovery in tort for purely economic losses. Wash. Rev. Code § 7.72.010 et seq. (establishing liability for manufacturer and seller but excluding from damages “direct or consequential economic loss”).
The Supreme Court of Washington engaged in an extensive discussion of the common law economic loss rule in Eastwood v. Horse Harbor Foundation, Inc., 241 P.3d 1256, 1263 (Wash. 2010). In Eastwood, the court concluded that the term “economic loss rule” was a misnomer and was more appropriately referred to as the “independent duty doctrine.” Id. at 1261. Thus, “[a]n injury is remediable in tort if it traces back to the breach of a tort duty arising independently of the terms of the contract.” Id. at 1262. To determine whether a duty arises independently of the contract, Washington courts first determine what duties have been assumed by the parties within the contract, and if a contract term (such as a term defining the scope of the parties’ contractual duties) is ambiguous, then the trial court must ascertain the intent of the parties. Berg v. Hudesman, 801 P.2d 222, 226 (Wash. 1990). Cases applying the doctrine to contract disputes, including in the construction context, continue to expand on this policy. See Pac. Boring, Inc. v. Staheli Trenchless Consultants, Inc., 138 F. Supp. 3d 1156, 1165 (W.D. Wash. 2015) (engineering consultant did not owe statutory duty to subcontractor, and so the latter had no cause of action for negligence).
Washington has limited the barring of claims under the independent duty doctrine to a “narrow class of cases, primarily limiting its application to claims arising out of construction on real property and real property sales.” Elcon Constr. Co. v. E. Wash. Univ., 273 P.3d 965, 969 (Wash. 2012). Such claims have included negligent design claims, defective installation where the risks involved were covered by the contract, and negligent misrepresentation. See Eastwood, 241 P.3d at 1274–75 (concurring opinion identifying cases). Lower courts are not permitted to expand the doctrine absent specific direction from the Supreme Court of Washington. Elcon, 273 P.3d at 969–70 (citing Eastwood). The rule does not apply to fraud claims. Id.
Enforceability of No Damages for Delay Clauses
The Washington legislature has declared that any clause in a construction contract “which purports to waive, release, or extinguish the rights of a contractor, subcontractor, or supplier to damages or an equitable adjustment arising out of unreasonable delay in performance which delay is caused by the acts or omissions of the contractee or persons acting for the contractee is against public policy and is void and unenforceable.” Wash. Rev. Code § 4.24.360; see also Scoccolo Constr. v. City of Renton, 145 P.3d 371, 375 (Wash. 2006) (finding that Wash. Rev. Code § 4.24.360 invalidated contract clause that precluded compensation for delays).
Strict Interpretation of Contract
Washington courts have adopted the “context rule” to interpret contracts. Berg v. Hudesman, 801 P.2d 222, 228 (Wash. 1990). Under the context rule, the court will look not only to the language of the contract, but also to “the contract as a whole, the subject matter and objective of the contract, all circumstances surrounding the making of the contract, the subsequent acts and conduct of the parties to the contract, and the reasonableness of the respective interpretations adopted by the parties.” Id. (quoting Stender v. Twin City Foods, Inc., 510 P.2d 221 (1973)). Washington courts will look to these issues with the touchstone of contract interpretation under Washington law in mind – the parties’ intent. Tanner Elec. Co-op v. Puget Sound Power & Light Co., 911 P.2d 1301, 1310 (Wash. 1996) (citing Scott Galvanizing, Inc. v. Northwest EnviroServices, Inc., 844 P.2d 428, 432 (Wash. 1993)). “Any determination of meaning or ambiguity should only be made in light of the relevant evidence of the situation and relations of the parties, the subject matter of the transaction, preliminary negotiations, and statements made therein, usages of trade, and the course of dealing between the parties.” Berg, 801 P.2d at 229. While Washington courts have held that a trial court may examine extrinsic evidence “for the purpose of aiding in the interpretation of what is in an instrument,” Id.; see also International Marine Underwriters v. ABCD Marine, LLC, 313 P.3d 395, 399-400 (Wash. 2013). Washington courts have made it equally clear that admissible extrinsic evidence does not include evidence that varies, contradicts, or modifies the written language of the contract. Bort v. Parker, 42 P.3d 980, 988 (Wash. Ct. App. 2003). Courts generally give words in a contract their ordinary, usual, and popular meaning unless the entirety of the agreement clearly demonstrates a contrary intent. Hearst Commc’ns, Inc. v. Seattle Times Co., 115 P.3d 262, 267 (Wash. 2005). Washington courts hold a contract provision to be ambiguous when it is fairly susceptible to two different, reasonable interpretations, but will not simply determine a provision to be ambiguous on account of parties suggesting opposing meanings. Wm. Dickson Co. v. Pierce County, 115 P.3d 409, 413 (Wash. Ct. App. 2005). Generally, Washington courts construe contract ambiguities against the drafter; however, if the drafter is unknown or if the parties drafted the contract together, Washington courts will adopt the interpretation that is most reasonable and just. Viking Bank v. Firgrove Commons 3, LLC, 334 P.3d 116, 120 (Wash. Ct. App. 2014) (citing Berg, 801 P.2d at 231.
Prompt Payment Requirements (Public/Private)
Washington Public – Wash. Rev. Code §§ 39.76.011 to 39.76.40, 39.04.250, 39.04.360 (2022) (owner to prime by date specified in contract but not later than 30 days of invoice or receipt of grant or federal money, whichever is later; prime to sub/sub to lower tier within 10 days of receipt of payment; up to 150% disputed amount may be withheld but owner to notify prime within 8 working days after receipt of payment and prime must notify affected subs or else interest applies; where prime withholds from sub, must pay sub within 8 working days after sub completes remedial action per notice; interest on monies due primes at 1% per month; interest on monies due subs at highest statutory rate allowed; attorneys’ fees and costs for prevailing party).
Washington 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).
Washington – N/A
Licensing Requirements for Construction Managers
Although there are no specific requirements for construction managers, the State of Washington requires contractors to register with Washington’s Department of Labor and Industries. Wash. Rev. Code Ann. § 18.27.020. The statute defines a “general contractor” as “one who superintends, or consults on, in whole or in part, work falling within the general definition of a contractor.” Id. § 18.27.010(5). Construction management duties are likely encompassed in the definition of general contractors, and thus, construction managers should register as such.