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Attack on Limitation of Liability Provisions

Limitation of Liability (LOL) provisions are an integral part of the risk management and contracting practices of most, if not all, of ACEC-CO’s member firms.  A recent ruling by a Larimer County court involving Terracon Consultants, Inc, a member firm, has put the enforceability of LOL provisions in serious jeopardy, especially in cases involving residential construction. Terracon is appealing this ruling.  At their January 20th Meeting, the ACEC/CO Board of Directors have agreed to support the effort to present an amicus brief to the Colorado Court of Appeals.  Other requests for support are being made to ASFE and other interested organizations. 

Summary of Dispute/Ruling
Terracon contracted with the builder/developer (Gallery Homes) for services at a residential subdivision in the Fort Collins area.  The contracts for Terracon services, signed by both parties, contained limitation of liability provisions.  A lawsuit was filed regarding two homes in that subdivision.  The two homeowners sued Gallery Homes but not Terracon, and Gallery Homes brought Terracon into the suit as a third-party defendant.  The homeowners settled with Gallery Homes before trial and their claims were dismissed.  The terms of the settlement are confidential but suffice it so say the homeowners were more than compensated for their issues and they have waived all remaining claims in the matter.   This settlement was reached without contribution from Terracon and the suit proceeded between Gallery Homes and Terracon.  Terracon sought enforcement of our agreed-upon limitation of liability provisions.

 
The trial court denied Terracon’s motions, finding that limitation of liability provisions violated CDARA (Colorado’s residential construction defect statute) and were void per public policy even as applied to disputes solely between commercial parties since the dispute involved residential property.  This finding is noteworthy in that this case involved a situation where the homeowner was made whole and had no interest to protect.  The statute prohibits limitations of liability provision as applied to homeowners but has no similar prohibition as applied solely between commercial parties.  The Court still felt compelled to void an agreed-upon contractual provision.   Equally troubling was the finding of the Court’s applicability of CDARA to Terracon’s contract, which was entered into and performed years before CDARA’s enactment. 

As a result of this decision, Terracon was forced to expend time and considerable expense to try the case.  Terracon received a complete victory at trial as no fault or liability was found as to Terracon. Gallery Homes has appealed the decision.  This allows Terracon to appeal the Court’s ruling regarding limitations of liability, given the short and long term ramifications of the decision.  Specifically, Terracon is appealing the Court’s finding that limitation of liability provisions are barred under CDARA as applied to disputes solely between commercial parties where homeowner interests are not at issue.  Terracon is also appealing the retroactive application of CDARA to contracts entered into and services performed prior to CDARA’s enactment.  While notices of appeal have been filed with the Court of Appeals, there is no timetable at this point for the appeal process. 

Potential Impact of Ruling to Member Firms Other than Terracon
Should the Gallery Homes ruling be allowed to stand, the immediate result would be increased potential liability for a number of our member firms who have designed residential projects in Colorado over the past decade or more. (A court in Jefferson County has already relied upon this ruling to void a similar commercial party limitation of liability provision.)  These firms performed projects anticipating contractual protections that will now no longer be available.  This ruling, if allowed to stand, will result in significant, possibly company-threatening additional risk.  This will also further impact the ability of member firms to obtain cost-effective Professional Liability insurance, which already is a significant issue in Colorado. 

In the larger picture, should this ruling be allowed to stand, it will further weaken the enforceability of LOL provisions overall.  The Court’s logic of using public policy to void contractual provisions against two commercial parties where no homeowners are directly or indirectly harmed could be used by subsequent courts to void LOL and other provisions outside CDARA-regulated projects, impacting even more member firms.