Many classes of professionals utilize engagement letters with limitation of liability language. For example, accountants, real estate agents and home inspectors often include in their engagements a hold harmless or other clause with the goal of limiting potential damages. Such a clause will establish the extent of exposure, if any, that the professional can be held liable for should problems arise with the engagement. The question of whether the clause is enforceable is state specific and somewhat unpredictable.
A recent South Carolina decision provides a great example of a well written limitation clauses that brought litigation to a screeching halt. In Gladden v. Palmetto Home Inspection, homeowners tested a limitation of liability clause within their home inspector’s engagement letter. Thomas and Vera Gladden appealed the South Carolina trial court’s order granting summary judgment to the home inspector, alleging that the limit of liability provision in a home inspection contract was unenforceable as violative of public policy and as unconscionable. The Supreme Court concluded that contractual limitation of a home inspector’s liability did not violate South Carolina public policy and was not unreasonable oppressive. Accordingly, the South Carolina Supreme Court enforced the limitation of liability clause and dismissed the lawsuit.
Unfortunately for the professional, a completely opposite result can be expected in other jurisdictions, such as New Jersey, where a home inspector may not limit its damages by contract. Lucier v. Williams, 841 A.2d 907 (N.J. Super. Ct. App. Div. 2004).
Given the uncertainty of limitation of liability clauses and the evolving body of state specific case law, it is difficult to predict how particular courts will interpret your clause. Accordingly, the following suggestions may provide some general guidance for professionals using or intending to incorporate similar clauses into their contracts:
- Limitations of liability are more likely to be upheld than complete waivers of liability.
- Limitations based on intentional acts are less likely to be upheld.
- A clause that expressly excludes indemnity liability is more likely to be enforced (but may offer the professional less protection).
- A clause is more likely enforceable if it includes a level of limitation proportionate to the professionals’ role in the project or expected fees.
- Recognizing that a limitation may not be enforceable, the professional should price the service to reflect the risk of potential liability, and consider additional insurance to cover the worst case scenario.
- Professionals should consult with counsel to periodically review the terms of engagement letters.