The Georgia Supreme Court’s recent decision in Lanier at McEver, L.P. v. Planners & Engineers Collaborative, Inc.,1 marks a milestone in Georgia jurisprudence with regard to limitation of liability clauses in design and construction contracts. In Lanier, the Court held that a clause limiting an engineer’s liability to its fee amounted to an indemnification obligation that was void as against public policy under Georgia law.2 As a result of this decision, contractors and design professionals in Georgia must not only take care in drafting compliant limitation of liability clauses, but also they should alter the standard risk allocation rubric used when calculating their fees.

Lanier involved the negligence and breach of warranty claims of Lanier at McEver, L.P. (“Lanier”), the owner and developer of an apartment complex, against its engineering firm, Planners and Engineers Collaborative, Inc. (“PEC”).3 After completing the apartment complex according to plans specified by PEC, Lanier discovered physical damage that an expert attributed to a negligently designed storm water drainage system. Lanier alleged that PEC’s defective design resulted in approximately $500,000 in damages to the developer, stemming from erosion, subsidence, and pavement settling and cracking across the property.4

In response to these allegations, PEC moved for partial summary judgment based on a limitation of liability clause (the “Clause”) in its agreement with Lanier that restricted PEC’s potential liability exposure to its fees, which totaled $80,514.5 The Clause read as follows:

[I]n recognition of the relative risks and benefits of the project both to [Lanier] and [PEC], the risks have been allocated such that [Lanier] agrees, to the fullest extent permitted by law, to limit the liability of [PEC] and its sub-consultants to [Lanier] and to all construction contractors and subcontractors on the project or any third parties for any and all claims, losses, costs, damages of any nature whatsoever[,] or claims expenses from any cause or causes, including attorneys’ fees and costs and expert witness fees and costs, so that the total aggregate liability of PEC and its sub-consultants to all those named shall not exceed PEC’s total fee for services rendered on this project. It is intended that this limitation apply to any and all liability or cause of action however alleged or arising, unless otherwise prohibited by law.6

The trial court held that the clause was merely a damages cap and granted PEC’s motion, a ruling that the Georgia Court of Appeals affirmed.7

The Georgia Supreme Court, overturning these prior rulings, held that the limitation on liability clause was an indemnity obligation that violated public policy, as opposed to a damage cap.8 The Court began its analysis by noting that parties can generally contract away liability for the consequences of their own negligence .9 Despite this general principle, the Court adopted Lanier‘s position that the clause was an indemnification that violated public policy as set out in Official Code of Georgia Annotated. § 13-8-2:10

[A] covenant, promise, agreement or understanding in or in connection with or collateral to a contract or agreement relative to the construction, alteration, repair, or maintenance of a building, structure . . . ,purporting to indemnify or hold harmless the promisee against liability for damages arising out of bodily injury to persons or damage to property caused by or resulting from the sole negligence of the promisee, his agents or employees, or indemnitee is against public policy and is void and unenforceable.

The Court reasoned that the purpose of O.C.G.A. § 13-8-2(b) “is to prevent a building contractor, subcontractor, or owner from contracting away liability for accidents caused by his negligence.”11 The Court held that the clause limiting PEC’s liability met the definition of an indemnity provision, an “obligation or duty resting on one person to make good any loss or damage another as incurred,” and, thus, was covered by O.C.G.A. § 13-8-2(b).12

The Court further explained that, although the contract did not exculpate PEC of all liability, it created a duty in Lanier to indemnify PEC for any judgment in excess of its fee.13 The Court determined that “while a third-party is not precluded from suing PEC for any negligent actions in constructing the storm water drainage system, the clause at issue here allows PEC to recover any judgment amount entered against it from Lanier once the $80,514 threshold has been surpassed, including judgment amounts on third-party claims for which PEC is solely negligent.”14 The Court reasoned that O.C.G.A. § 13-8-2(b) was enacted to prevent this precise form of result and found the clause invalid.15

The Court construed the clause as one for indemnification based upon the possibility that a third-party might sue PEC and, in that instance, PEC would turn to Lanier for indemnification in reliance upon the limitation of liability clause.16 These third-party claims were purely hypothetical, as only the developer, Lanier, had experienced damages.

The Court also ignored language in the Clause that expressly excluded limitations that were “otherwise prohibited by law.”17 This indicates that parties cannot rely on such language to “save” a broad limitation of liability provision. Further, as noted by the dissent, the Court’s holding took PEC’s negligence for granted, rather than waiting for evidence to be presented at trial, so a design professional or contractor may not be able to rely on its demonstrative lack of negligence to protect it.18

The Court’s opinion concludes with a description of the methods by which the Court contends PEC could have drafted its limitation of liability to comply with Georgia law and public policy.19 For example, Georgia courts have held that limitation of liability clauses that restrict damages to only those between the contracting parties are valid.20 The Court also noted that PEC’s limitation of liability clause might have been upheld if Lanier and PEC had agreed to shift the risk to an insurer under an insurance clause encompassing the indemnity provision.21 Contractors and design professionals should take special care to adhere to these precepts. It is possible that the Court may have enforced PEC’s limitation of liability clause had it included the following language, “; provided, however, that this limitation of liability shall not apply to third-party claims for personal injury or property damage to the extent caused by or resulting from the sole negligence of PEC and its sub-consultants.”

Other U.S. jurisdictions have upheld limitation of liability clauses similar to the one rejected by the Court in Lanier.22 In the recent WLB Group decision, which involved claims for negligence by an owner against its surveyor/engineer, the Supreme Court of Arizona held that a provision with the following language was not void as contrary to public policy:

Client agrees that the liability of [surveyor/engineer], its agents and employees, in connection with services hereunder to the Client and to all persons having contractual relationships with them, resulting from any negligent acts, errors and/or omissions of [surveyor/engineer], its agents and/or employees is limited to the total fees actually paid by the Client to [surveyor/engineer] for services rendered by [surveyor/engineer] hereunder.23

The Supreme Court of Arizona noted that “[c]ourts…are hesitant to declare contractual provisions invalid on public policy grounds.”24 The WLB Group court rejected the owner’s argument that the limitation of liability clause violated Arizona’s anti-indemnity statute, stating that “[t]he provision in the [surveyor/engineer’s] contract does not completely insulate [surveyor/engineer] from liability, as would an indemnity or hold harmless provision, nor does it require [owner] to defend [surveyor/engineer]. The provision merely limits liability.”25

Despite the fact that the limitation of liability clause in WLB Group was quite broad, the court distinguished the Lanier holding because the limitation of liability clause at issue in Lanier explicitly references third-party claims.26 This underscores the importance of removing this “third-party” language from limitation of liability provisions, at least for projects where Georgia law would apply.

The Georgia Supreme Court’s application of O.C.G.A. § 13-8-2(b) to a standard limitation of liability provision will impact not only the risk allocation methods for contractors and design professionals, but also the price structures they employ. Going forward, contractors and design professionals must be aware of the serious implications of overly broad limitation of liability clauses and draft these clauses to conform with the Court’s Lanier opinion. Further, Georgia courts’ application of Lanier is untested and, in the face of this lack of clarity, contractors and design professionals must take into account their potential exposure when preparing their bids, calculating their fees, and determining how much liability insurance they need to purchase.