United States District Court in New Jersey Considers Effect of Waiver of Consequential Damages and Damages Cap on Indemnification Provisions Contained in Architect’s Contract

Atlantic City Associates LLC v. Carter & Burgess Consultants, Inc.
2008 U.S. Dist. LEXIS 93684 (D.N.J. Nov. 13, 2008)

The United States District Court for the District of New Jersey was asked to resolve the effect of liability limiting provisions on an architect’s indemnity obligations to an owner under a professional services agreement. Determining that the consequential damages provision and the indemnification provision contained in the agreement could be harmonized, the Court held that the architect would only be liable for indemnification of direct, and not consequential, damages. The Court held, however, that a damages cap contained in the architect’s proposal, which was made a part of the contract by incorporation, could not be harmonized with the indemnity clause, so that under the contract, the indemnity provision took precedence over the damages cap.

Plaintiff Atlantic City Associates LLC (the “Owner”) is the owner/lessee of The Walk in Atlantic City, New Jersey (the “Project”). The Owner entered into two separate contacts with defendant Carter & Bergess Consultants (the “Architect”) pursuant to which the Architect was to provide design services for the Project. The contracts incorporated the Architect’s proposal by reference, but only to the extent that the terms of the proposal did not conflict with the terms of the contracts.

The Project experienced delays and, as a consequence, the parties sought delay damages against one another. An issue arose as to whether the Architect’s liability to the Owner was limited by a waiver of consequential damages contained in the contracts or a limitation of liability provision contained in the proposal which capped the Architect’s liability to the total compensation it received. Also at issue was the effect of an indemnification provision in which the Architect agreed to indemnify the Owner for any and all damages resulting from its negligent acts, errors or omissions.

Applying New Jersey law, the District Court first found that the indemnification provision could be harmonized with the waiver of consequential damages provision. The Court concluded that the waiver only extended to consequential damages, not direct damages. Accordingly, the indemnification provision was construed to limit the Architect’s indemnification obligation to direct damages suffered by the owner.

The Court next turned to the question of whether the Architect’s liability was capped by virtue of the limitations of liability clause in the proposal. On this issue, the Court concluded that the limitation of liability contained in the proposal conflicted with the indemnification provision of the contract. The Court reasoned that the indemnification provision required indemnification against any and all damages caused by the Architect’s negligent acts, errors or omissions while the limitations of liability capped the liability. Given the contract’s provision which provided that if there was a conflict between the proposal and the contract, the contract would govern, the Court found that the indemnification provision controlled and the Architect’s liability was not capped at the amount of compensation received by the Architect.

Click here for full text opinion provided courtesy of LexisNEXIS.

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