Construction Claims and Exceptions to Limitation of Liability: Bad Faith, Fraud, Recklessness

Description

A common feature of many construction and design contracts is a limitation of liability clause that limits or "caps" the amount of potential damages a party faces in the event of a breach. Courts will generally enforce limitation of liability clauses but there are at least four common ways to attack their enforceability under common law.

It is typically held that as a matter of public policy, a party should not benefit from a bargain it performed in bad faith. Examples of bad faith include "evasion of the spirit of the bargain, lack of diligence and slacking off, willful rendering of imperfect performance, abuse of a power to specify terms and interference with or failure to cooperate in the other party's performance."

Another way to attack a limitation of liability clause is to consider whether a party seeking to invoke the limitation clause acted fraudulently or engaged in other intentional torts. The Restatement (Second) of Contracts prohibits contracts from exempting parties from "intentional ... tort liability." Fraud is one type of intentional tort, but this general statement about "intentional tort liability" would encompass other intentional torts, such as a breach of a fiduciary duty and the intentional interference with contract or business expectancy.

A party's reckless tort behavior may also render a limitation of liability clause unenforceable. Again, the Restatement (Second) of Contracts prohibits contracts exempting parties from "reckless tort liability." A party acts recklessly even if the party did not realize the high degree of risk involved but a reasonable person would have.

Listen as our expert panel discusses how a limitation of liability clause is not ironclad. The panel will discuss best practices when bringing a claim that seeks to avoid the limitation of liability due to one of these exceptions.