Special Bulletin

Often when an owner or general contractor retains the services of a professional, such as an architect or engineer, the contract provided by the professional contains a limitation of liability clause. The clause will seek to limit or cap the damages recoverable from professionals for the professional's own negligent or wrongful acts or omissions. In North Carolina, the question often arises as to whether such clauses are enforceable or are void as against public policy. On April 1, 2008, the North Carolina Court of Appeals shed some light on this issue in its decision in Blaylock Grading Co. v. Smith ("Blaylock").

The Blaylock Case

In Blaylock, the Court enforced a limitation of liability clause in a contract between a grading company and a surveyor. The grading company retained the surveyor to survey certain property. The surveyor's contract contained a clause that limited the surveyor's liability for errors to $50,000.00. Unfortunately, the surveyor failed to properly survey the property, and the surveyor's error required the grading company to import additional soil in order to raise the elevation of the property. As a result of the surveyor's error, the grading company incurred an additional $500,000.00 in expenses.

The grading company brought suit against the surveyor for breach of contract and negligence. The jury found in favor of the grading company and awarded it $574,714.00 in damages. After the jury returned its verdict, the surveyor requested that the trial judge limit its damages to $50,000.00 pursuant to the limitation of liability clause it had included in the parties' contract. The grading company argued that because professionals such as surveyors are licensed and "extensively regulated" by the state, they necessarily provide a "public service," and North Carolina case law is clear that it is against public policy for a public service provider to limit its liability. The trial judge agreed and imposed a judgment against the surveyor in the full amount of $574,714.00.

On appeal by the surveyor, the Court of Appeals reversed the trial judge and enforced the contractual limitation of liability. The Court held that the fact a professional is licensed and regulated by the state does not necessarily turn the professional into a public service provider similar to a common carrier or a public utility which provides services to the public at large. Rather, the nature of the specific service provided by the professional determines if it is a public service or not. Because the services being performed by the surveyor in Blaylock were not intended to serve the public at large, the surveyor was not providing a public service. In addition, the Court held that when a breach of contract between two parties results only in economic loss, the health and safety of the public is not implicated.

In further analyzing the enforceability of the surveyor's limitation of liability clause, the Court pointed out that the grading company had stipulated there were no irregularities in the formation of the contract, thus acknowledging that the contract was not unconscionable and that the parties were both sophisticated entities who had negotiated the contract in an arms-length transaction. The parties understood the terms of the contract and had negotiated an allocation of the risk of error on the part of the surveyor. Accordingly, the limitation of liability clause did not violate public policy and was enforceable, limiting the surveyor's liability for its error to $50,000.00.

Lessons Learned from Blaylock

The Blaylock decision helps to clarify that limitation of liability clauses found in a professional's contract negotiated by two experienced and sophisticated parties are enforceable in North Carolina. However, it still is unclear if such clauses will be enforced if the professional's contract is with a party inexperienced in transactions of a like nature, such as a property owner who does not routinely engage construction industry professionals. Because of its reliance on the grading company's stipulation that there was no "irregularity" in the negotiation of the contract at issue, the Court of Appeals may be indicating that in situations where there is a possibility that an experienced professional may have taken advantage of an inexperienced or unsophisticated party, any clause limiting the liability of the professional will be scrutinized further by the Court and may not be enforced.

Blaylock may not have answered all of the outstanding questions as to the enforceability of limitation of liability clauses, but it has helped shed some light on how the North Carolina courts will address such clauses. Professionals have been given the opportunity to include liability limitations and risk allocation provisions in their contracts, at least as long as there is no indication that the professional has taken advantage of an inexperienced and unsophisticated party and the provisions are not so one-sided as to be "unconscionable." On the other hand, owners and contractors have been warned to better scrutinize the contracts of any professional engaged for a project, to assume that any limitation of liability clauses inserted by the professional will be enforced as written, and to negotiate such clauses away or modify them to ensure that they are adequately protected against losses caused by the professional's errors.

For further information regarding the issues described above, please contact Thomas S. Babel at (910) 794-4839.

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This Special Bulletin is not intended to give, and should not be relied upon for, legal advice in any particular circumstance. No action should be taken in reliance upon the information contained in this Special Bulletin without obtaining the advice of an attorney.