June 23, 2008

Broad exculpatory clauses that are written to foreclose certain third-party claims against design professionals and construction managers are routinely included in construction contracts. Notwithstanding those clauses, some courts are holding that construction professionals may be liable to third parties due to the nature of the construction professional's contractual undertaking. For example, a construction manager who agrees to supervise safety on the jobsite might be liable for negligently supervising safety notwithstanding the presence of an exculpatory clause that insulated the construction manager's liability from third parties. Likewise, an engineering firm may be liable for its professional negligence notwithstanding the presence of a broad exculpatory clause in a construction contract because a court may conclude that an engineer has a nondelegable duty to provide its services with ordinary care and diligence.

Two recent cases, one out of the Supreme Court of Pennsylvania and one out of the U.S. Court of Appeals for the 5th Circuit have addressed these issues and have determined that construction professionals might be liable to third parties notwithstanding exculpatory clauses.

Safety Related Duties
Farabaugh & Pennsylvania Turnpike Com'n, 911 A.2d 1264 (PA. 2006) involved an action by the wife of a deceased construction worker of general contractor against the construction manager. The worker died on the jobsite when a haul road collapsed. The haul road was part of the general contractor's worksite. The contract between the Pennsylvania Turnpike Commission and the general contractor provided that the general contractor would assume responsibility for the injuries its employees sustained on the jobsite. Moreover, that contract also provided that the general contractor agreed that PTC's acceptance of its safety program did not relieve or decrease the general contractor's liability for safety and that the contract would not act to make the owner, engineer or any other party other than the general contractor solely responsible for safety.

The contract between PTC and the construction manager provided that the CM would assume responsibility for monitoring the general contractor's compliance of safety procedures. The contractor's wife (plaintiff) sued the CM for wrongful death. She claimed that the construction manager's negligence in monitoring and supervising safety was a proximate cause of her husband's death and that the construction manager assumed a duty of care to her husband to perform its contractual obligations of providing safety oversight and inspection services in a manner that did not compromise the safety of workers on the worksite. 

The CM claimed that it owed no duty to decedent, whose death resulted from the negligent construction and maintenance of the haul road by the general contractor.  Thus, the CM contended that it did not owe the third-partydecedent a duty because the CM was only responsible for oversight of safety (i.e., to see that the general contractor's employees followed their own safety procedure). Moreover, the CM sought to persuade the court to define the scope of a construction manager's duty to employees of other contractors as being merely responsible for monitoring the contractor's compliance with its own safety plans.

The court responded by distinguishing between duties that are delegated and those that are assumed. Here, the court held that the construction manager owed a duty because the contract between PTC and the CM called for the construction manager to assume an active roll in safety. According to the court, the construction manager therefore potentially could be found responsible to thirdparties because it assumed an active roll in safety of project site notwithstanding the exculpatory language in the contract with the general contractor.

Engineer's Inspection Duties
In Lyndon Property Ins. Co. v. Duke Levy and Associates,LLC, 475 F.3d 268 (5th Cir. 2007) the performance bond surety for a defaulted contractor on a county sewer project brought an action for negligence against the engineer, whom the public owner hired. The surety completed the work with a new contractor following the termination and alleged that it paid the completion contractor more than $900,000 to fix and test work performed by the defaulted contractor that had been inspected and approved by the engineering firm. The engineer claimed that it did not owe any duty to third parties (such as the surety) because of a contractual disclaimer and that it was, therefore, not liable. That clause provided as follows:

Neither ENGINEER's authority to act under [the] Contract documents nor any decision made by ENGINEER in good faith either to exercise or not exercise such authority shall give rise to any duty or responsibility of ENGINEER to CONTRACTOR, any Subcontractor, any Supplier, or any other person or organization performing any of the Work, or to any surety for any of them.

The trial court ruled that this provision precluded the surety's claim against the engineer.

In applying Mississippi law, the 5th Circuit noted that, an architect or engineer generally has a professional nondelegable duty and is required to exercise ordinary professional skills and diligence. The engineer did not contest this general characterization, however, but argued that the exculpatory clause nonetheless limited its liability so that it was only liable to the public owner and not to third parties.

The 5th Circuit noted that Mississippi law assesses exculpatory clauses with strict scrutiny. Consequently, the courts applying Mississippi law will not enforce exculpatory clauses unless the court determines that the parties understood the extent of the exculpatory clause and that they fairly and honestly negotiated it. Moreover, the Court indicated that the law does not look upon exculpatory clauses favorably, but will enforce them when the court finds that the parties understood the extent of the exculpatory clause and that they fairly and honestly negotiated for it.

In this case, the Court determined that clause was not sufficiently clear to act as a limitation of liability because the court did not find that the parties either understood the clause or that they fairly and honestly negotiated for it. Furthermore, the Court held that the county could not bargain away the engineer's potential duty to a surety who would step in the shoes of the county under equitable subrogation.

Comment
The interpretation of exculpatory clauses are usually controlled by state law and it is difficult to draw general conclusions regarding the effect of such clauses. However, both decisions illustrate a degree of judicial scrutiny provided to these clauses and that design, engineering and construction management firms may still be liable to third parties notwithstanding the use of such clauses. Certainly, firms providing professional services in conjunction with construction projects need to consider the nature and extent of their insurance coverage as well as adequacy of fees paid for their services given the potentially expanded liability risks.

John S. Tobey
404/582-8054
[email protected]
Member of the State Bar of Georgia