Re: Engineering Professionals' Limitation of Liability
The California Court of Appeals for the Second Appellate District (Los Angeles County) has just published a decision declaring unenforceable the usual and customary liability limitation clause limiting an engineering professional's liability to the greater of a fixed amount or the consultant's fee. Viner v. Brockway (2nd Appellate District, December 14, 1994) 94 CDOS 9497. The two most significant facts in determining the clause to be unenforceable in this case were the relative sophistication of the parties and their relative bargaining power, the plaintiffs were ordinary homeowners and the defendants were licensed engineers. The court distinguished a prior case upholding such a clause where the parties were a large engineering firm and a large real estate development company, of relatively equal sophistication and relatively equal bargaining power, from this case involving an individual engineer and an individual homeowner.
The consequence of this case is that whenever an engineering firm is dealing with a homeowner, consumer, or relatively small business, the engineering firm can expect that a court is unlikely to enforce such a limitation of liability clause, and that when an engineering firm is dealing with a large and sophisticated company, the engineering firm can expect that the limitation of liability clause will be challenged and that it will not be possible to have the case dismissed early by demurrer or summary judgment, since it will take a trial to determine whether enough of the factors listed by the court exist to determine whether or not the limitation of liability clause is enforceable or unenforceable.
Viner and his neighbor (also a plaintiff) owned homes on several steep hillside lots in the city of Los Angeles. Numerous slides occurred over a 20 year period, and in 1978 the City of Los Angeles ordered the slope stabilized. The initial engineering firm the owners consulted recommended a very expensive reconstruction of the slope with a large retaining wall and drains. The owners sought out cheaper alternatives and found two engineers who recommended a much less expensive gabion blanket repair system and convinced the City that this repair would work. It didn't and the owners suffered in excess of $3 million in damages of which $893,419.00 was attributed to the engineers.
The retainer agreements with the engineers (which were not signed) contained the usual liability limitation clause limiting the engineer's liability for professional negligence to the greater of $25,000.00 or the engineer's fees. One of the owners actually hired an attorney and negotiated an increase to the maximum amount. The court listed six factors to be examined in order to determine whether the clause should be denied enforcement as unconscionable or violative of public policy:
- Concerns a type of business generally though suitable for public regulation;
- The service is of great importance to the public and is often a matter of practical necessity for some members of the public;
- The service is offered to any customer who seeks it, or at least any customer coming within certain established standards;
- As a result of the essential nature of the service in the economic setting of the transaction, the service provider possesses a decisive advantage of bargaining strength against the customer who seeks the service;
- In exercising superior bargaining power, a standard adhesion contract limiting liability is used and makes no provision for the customer to pay an additional reasonable fee to obtain greater protection against negligence; and
- The transaction places the person or property of the customer under the control of the professional and subject to the risk of carelessness by the professional or his agents. Tunkl v. Regents of the University of California (1963 Supreme Court) 60 Cal.2d 92, 98-101.
The court declared that it is only necessary that some and not all of these characteristics be present in order for the liability limitation clause to be declared unenforceable. The Tunkl case involved a hospital. In the case of a professional engineer, characteristics 1, 2, 3 and 6 almost always will be present. Engineers are licensed and regulated, making the business subject to public regulation. The engineer's services will be mandatory in order for the owner to obtain his building permit or to obtain the services of his architect. Whether or not the engineer holds himself out as willing to perform the services for any or most members of the general public will be a factual determination which will require a trial. The fact that the engineer limits his practice to providing the services to architects or contractors or only to participants in specific industries will still require a factual determination and in most cases a trial. While the client's property will rarely be placed under the actual control of an engineer, the fact that the engineer's calculations cannot be reviewed, understood and verified by the client himself nonetheless places the client and his property at the risk of carelessness of the engineer.
While an engineer may be able to control the fourth and fifth characteristics and possibly the third characteristic by the selection of his clients or the negotiation of the terms of the limitation of liability clause, the absence of the third, fourth or fifth characteristics described above or even all of them may not be sufficient to obtain dismissal of the action prior to trial or even to obtain the benefits of the liability limitation clause at trial.
The court specifically discussed Civil Code _2782.5 which specifically allows engineers and contractors to negotiate and expressly agree to liability limitation provisions, holding that in any case where some or all of the characteristics described from the Tunkl decision are present, that the liability limitation provision can be determined to be unconscionable or contrary to public policy, and therefore unenforceable.
Liability limitation clauses still should be included in your retainer agreements, since they will be enforceable in some situations and will be helpful in negotiating settlements. As suggested in item five of the Tunkl list, some effort should be made to offer and document the offer of higher liability limits in exchange for a higher fee. Combined with inspection services during the course of construction, this is your best, though substantially less than adequate, protection.
Your best defenses against liability or even claims for professional negligence remain the quality of your work, providing inspection services to assure that the work is performed properly so that the project is successful and the client is satisfied, and insurance.
Should any questions or problems arise concerning the matters discussed above, please call me.