Lucier and Mango: The Future of Contractual Limitations of Liability in New Jersey?

Construction professionals seeking to control risk turn to self-protective language in their contracts. The contract presents the initial, and sometimes only, opportunity for professionals to attempt to limit liability to the owner. This approach has worked well for construction professionals, as New Jersey courts have traditionally upheld contractual limitations of liability under fundamental contract principles. However, two recent Appellate Division decisions could hinder the construction professional's ability to limit claims in the future: the Lucier and Mango courts both held that limitation of liability provisions were "unconscionable," with particular attention focused on public policy concerns, marking a clear departure from our courts' former decisions based on contract principles.

Marbro, Inc. v. Borough of Tinton Falls, decided in 1996, is one such case in which a contractual limitation of liability was upheld. The court granted partial summary judgment to an engineering firm seeking to enforce a limitation of liability provision in its contract with Tinton Falls. The provision at issue caps the engineer's liability to the estimated value of professional services to be rendered in the Borough.

The court's decision was rooted in fundamental contract principles. The court noted that contracts made by the parties should ordinarily be enforced and that parties to a contract may agree to limit their liability as long as the limitation does not violate public policy. The court reasoned that the limitation of liability clause in question was not violative of public policy because it did not shield the engineering firm from all potential liability for professional negligence: if it were determined that the firm acted in a negligent manner, it may be held liable for $32,500, representing the amount of the total fee for services rendered under the construction contract. Since the firm stood to lose its total fee for services rendered if negligence were found, this was not a liability cap so low as to minimize the firm's concern for the consequence of a breach of contract.

In addition, the court applied another well-settled principal to the instant matter-that parties bargaining at arms-length may generally contract as they wish. The court determined that the contract between the engineering firm and the Borough was indeed an arms-length transaction, as the Borough had at its disposal engineers and attorneys to review the contract and ensure its reasonableness before it was executed. These individuals had an opportunity to scrutinize the limitation of liability provision. Therefore, the Borough was neither powerless to negotiate the terms of the contract nor disadvantaged during the bargaining process.

Two recent Appellate Division decisions may eventually have significant consequences for the limitation of liability provision in the construction contract. While it is too early too tell what impact, if any, these cases will have on the ability of construction professionals to limit liability in their contracts, it is worth a look at the court's reasoning in these decisions.

In February of this year, the court decided Lucier v. Williams, in which a home inspector issued a favorable home inspection report. Soon after the buyers took possession, however, the roof of the house began to leak, indicating the existence of defects overlooked by the inspector. The limitation of liability provision in the home inspection contract was held "unconscionable", as it limited the inspector's liability to only 50% of the total fees paid by the homeowners to the inspector (amounting to only a few hundred dollars). The court's decision was based on contract principles as well as concern for public policy.

The court reasoned that, while a fundamental proposition is that contracts will be enforced as written, "courts have not hesitated to strike limited liability clauses that are unconscionable or in violation of public policy." The court also considered other factors in determining whether to enforce the limitation of liability provision at issue: the adhesive nature of the contract, the parties' relative bargaining power, and the public interest affected by the contract.

In applying these principles to the home inspection contract, the court found that the contract, which was prepared by the inspector, was one of adhesion. Unlike Marbro, there were no negotiations, and the contract was presented to the homeowner on a take-it-or-leave-it basis, without any opportunity for him to negotiate or revise any of its terms. Moreover, the bargaining position of the parties was found to be grossly unequal. The home inspector was a professional; the homeowners, on the other hand, were consumers who relied on the diligence and competence of the home inspector and who had every reason to expect he would discover and report major defects.

The court also determined that the impact of the liability clause was negligible to the home inspector while potentially severe to the home buyer. If the home inspector's only consequence is the obligation to refund a few hundred dollars to the homeowners, there would be no meaningful incentive to act diligently in the inspection of homes. Such a restricted damage allowance effectively immunizes the inspector from the consequences of his own negligence and is grossly disproportionate to the potential loss to the home buyer if a substantial defect were negligently overlooked- indeed, the inspector's alleged negligence cost the Luciers upwards of $8,000-$10,000 in roof repairs.

Finally, the court held that the limitation of liability clause was against public policy, as it would allow the home inspector to circumvent the state's public policy of holding professional service providers to certain industry standards. The provision conflicted with the purpose of a home inspection contract, which is to render a reliable evaluation of a home's fitness for purchase.

The Appellate Division followed suit in Mango v. Pierce-Coombs, et al., decided in June of this year. As in Lucier, the septic inspector concluded that the system was flowing suitably. However, soon after the buyer moved into the house, she experienced problems with the septic system, indicating a negligent septic inspection. The failure of the septic inspector to conduct a thorough examination of the system and render an accurate report ultimately cost the home buyer thousands of dollars in repairs and re-design of the system.

The court held that the rationale expressed in Lucier was applicable to the "Septic System Certification", which limited the inspector's liability to the day of testing. The court determined that the provision limiting the effect of the inspector's certification to the day of testing was unconscionable and unreasonable. The court found that such a limitation obliterated the purpose for which the inspector was hired, which was to provide guidance to the prospective purchaser on the suitability and good working order of the septic system after the buyer would take title and possession. As in Lucier, the buyer sought a reasonable evaluation as to whether the septic system would work in the reasonably foreseeable future, and therefore, it would make no sense to restrict the inspector's liability to the day of testing.

There are, of course, differences between the circumstances examined above which are worth noting. Marbro played out in the commercial context, whereas Lucier and Mango both unfolded in the residential context. Marbro involved professionals on both ends of the deal, who had access to resources, such as experts and attorneys to assist during contract negotiations. However, in Lucier and Mango, consumers relied on the knowledge of experienced professionals, thereby rendering the bargaining power disproportionate. In addition, the potential loss for the engineering firm in Marbro was substantial- the total fee for services, amounting to $32,500, whereas in Lucier, the potential loss was minimal, and in Mango, the liability cap was practically non-existent. Thus, the regard for bargaining power and public policy that was so central to the courts' holdings in Lucier and Mango was not a concern for the Marbro court.

While the Lucier and Mango decisions are certainly not a blanket bar to the enforcement of limitation of liability in the contracts of construction professionals, the court has been influenced by an awareness of the consumer's vulnerability to limitation of liability provisions. For now, the commercial context has yet to be affected by the public policy and fairness concerns expressed in Lucier and Mango. One can see, however, how the same line of reasoning employed in these cases could be applied to the construction contract given the appropriate set of circumstances.