Colorado Enforces Ambiguous Limitation of Liability Clauses

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Snell & WilmerOn September 23, 2021, the Colorado Court of Appeals issued its opinion in Johnson Nathan Strohe, P.C. v. MEP Engineering, Inc., addressing a matter of first impression. The court of appeals held for the first time that an ambiguous limitation of liability clause may be enforced. This stands in contrast to ambiguous exculpatory agreements, which have long been deemed unenforceable in Colorado.

Background

Johnson Nathan Strohe, P.C. v. MEP Engineering, Inc. involves the design and construction of a Denver apartment building. The project owner hired the plaintiff-architect to design the apartment building. In turn, the architect hired the defendant-engineer to provide mechanical, plumbing, and electrical design services, including the design and implementation of a heating and hot water system. The architect and engineer’s contract included a limitation of liability provision stating:

Limitation of Liability: In light of the limited ability of the Engineer to affect the Project, the risks inherent in the Project, and of the disparity between the Engineer's fees and the potential liability exposure for problems or alleged problems with the Project, the Client agrees that if the Engineer should be found liable for loss or damage due to a failure on the part of MEP-ENGINEERING, INC. such liability shall be limited to the sum of two thousand dollars ($2,000 or twice The Engineer's fee whichever is greater) as consequential damages and not as penalty, and that is liability exclusive.

Later, significant issues arose concerning the heating and hot water system. The building owner filed an arbitration demand against the architect, and a $1.2 million damages award was entered against the architect. The engineer was not a party to the arbitration.

The Lawsuit

Thereafter, the architect sued the engineer seeking to recoup the amount for which it was found liable in the arbitration. In turn, the engineer filed a motion for a legal determination of the enforceability of the limitation of liability provision in its contract. The architect argued, in part, that the provision was ambiguous and thus unenforceable. The district court disagreed and dismissed the case after the engineer deposited $252,720 (twice its fee plus interest) into the court’s registry.

The architect appealed, arguing that the district court erred in finding the limitation of liability provision unambiguous. The court of appeals agreed, holding that the limitation of liability provision was ambiguous. The court of appeals focused in on the provision’s application to “consequential damages” and whether the provision thus applied only to consequential damages but not other forms of damages.

Notwithstanding, the court of appeals went on to hold that “a limitation of liability in a commercial contract is not void merely because it is ambiguous. Like other ambiguous contract provisions, the meaning is a question of fact that courts must determine using ordinary methods of contract interpretation.” In so holding, the court of appeals decided that limitation of liability provisions should be treated like run-of-the-mill contract provisions and not like exculpatory provisions, which are void and unenforceable if ambiguous. The court of appeals explained that while limitations of liability and exculpatory provisions both reduce liability, “they are different in kind.” Exculpatory agreements bar liability entirely whereas a limitation of liability provision still renders a party liable but at a “bargained-for level.” The court of appeals remanded to the district court to determine the meaning of the limitation of liability of clause.

Takeaways ]

Johnson Nathan Strohe, P.C. v. MEP Engineering, Inc. is reflective of Colorado’s permissive approach towards parties’ ability to limit (but not escape) liability. The case is a clear signal that parties involved in commercial construction cases should take extreme care when negotiating limitation of liability provisions in their contracts as those provisions are likely to be enforced.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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