Limitation of Damages Clause in Contract Held Inapplicable to Subcontractor’s Change Order Claim

Bradley Arant Boult Cummings LLP

Bradley Arant Boult Cummings LLP

Construction contracts often include clauses that purport to limit the liability of one or both parties. This includes clauses that completely prohibit any claims for certain types of damages such as lost profits and other consequential damages, extended overhead or other “delay” damages, and exemplary/punitive damages. Contracting parties may also include clauses that purport to cap liability at some amount such as the contract price or other sum certain. The legal effect of such clauses is a frequently litigated issue.

Such was the case in a decision released last week in BAE Systems v. Fluor Federal Solutions. That case involves the design and construction of a new nitrocellulose production facility at a U.S. Army ammunition plant in Radford, Virginia. BAE, the prime contractor, subcontracted the design work to Fluor. The Fluor subcontract included the following limitation of damages (LOD) provision: “Except as otherwise provided in this Subcontract, damages and remedies that may be recovered by either Party shall be limited as follows: For all claims, regardless of the basis on which the claim is made, the applicable party’s liability for damages arising under or related to this Subcontract shall be limited to $30M, $30M being defined as the value including all changes and the maximum liability for damages.”

The question presented to the court was whether the $30 million cap limited Fluor’s right to recover for change order work that exceeded the cap. In holding that the $30 million cap did not apply to Fluor’s change order claims, the court employed several of the basic rules of contract interpretation that we looked at last year. Here is the meat of the court’s analysis:

[T]he fundamental canon of contract construction that a specific provision of a contract governs over one that is more general in nature. The ordinary rule in respect to the construction of contracts is this: that where there are two clauses in any respect conflicting, that which is specially directed to a particular matter controls in respect thereto over one which is general in its terms, although within its general terms the particular may be included. Because, when the parties express themselves in reference to a particular matter, the attention is directed to that, and it must be assumed that it expresses their intent whereas a reference to some general matter, within which the particular may be included, does not necessarily indicate that the parties had the particular matter in thought.

Here, all LOD provisions are limited by the phrase “except as otherwise provided in this Subcontract.” This language necessarily implies that there are exceptions to this general provision provided elsewhere in the Subcontract. To hold otherwise would render the limiting language meaningless. In particular, the Changes Clause provides the process by which BAE could direct changes to Fluor’s scope of work and by which Fluor could submit a PCN to BAE if such a change caused an increase or decrease in the cost of or the time for performance of the Subcontract. The Changes Clause provides that BAE “may, at any time, exclusively by a written order signed by its procurement Representative, and without notice to sureties, if any, make changes within the general scope of this contract” in any matter affecting the contract.  It further provides that “if any such change causes an increase or decrease in the cost of or the time required for performance of the contract, an equitable adjustment shall be made in the contract price, the delivery schedule, or both.” This clause leaves no room for ambiguity—if there is a change made by BAE within the general scope of the contract there shall be an equitable adjustment.

Contract language will not be treated as meaningless where it can be given reasonable meaning.  When two provisions of a contract seemingly conflict… they should be harmonized so as to effectuate the intention of the parties as expressed in the contract as a whole. To interpret the LOD provisions as applying to the changes clause… would render the “except as otherwise provided” language meaningless and eviscerate the requirement that the parties “shall” reach an equitable adjustment wherever the scope of work or time of performance was changed. The Changes Clause makes clear that “nothing contained herein shall effect the right of the Parties to an equitable adjustment by reason of the change, pursuant to this clause.”

The court further held that the LOD provision did not apply because Fluor’s claim for an equitable adjustment under the change provision was not a claim for “damages” (the term used in the LOD provision). Finally, if the limitation of damages provision could be interpreted to apply to Fluor’s claim, it would be null and void under a Virginia statute that prohibits clauses waiving a subcontractor’s right to assert claims for demonstrated additional costs of performance.

A copy of the court’s decision can be downloaded here. The matter is currently being tried before U.S. District Judge Robert Ballou of the Western District of Virginia.

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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