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Virginia Designers Rejoice: A/E Limitation of Liability Clauses are Allowed (Again?)

Virginia General AssemblyThe Virginia General Assembly passed a statute, HB 797, that expressly permits architects and engineers to enter into contractual limitation of liability clauses.  The ACEC, VSPE, and VSAIA actively pushed to change the statute in the wake of several cases which ruled that previous language in the corporate enabling statute barred limitation of liability clauses for design professionals.  As can be sen from the bill tracking, the measure passed fairly easily in both the House and the Senate.

In Virginia, most assuredly a freedom of contract state, why did courts feel compelled to toss these frequently used contract provisions?  The friction came from the statute which permitted architecture and engineering firms to practice as corporations.  The current statutory language provided:

No such organization shall limit the liability of any licensee or certificate holder for damages arising from his acts or limit such corporation, partnership, sole proprietorship, limited liability company, or other entity from liability for acts of its employees or agents.

In 2007, an order from the Arlington County Circuit Court used this language in the corporation statute to hold that contractual limitations of liability were unenforceable.  In 2008, the Rockingham County Circuit Court reached the same conclusion

Critics of the decision pointed out that the statute in question was dealing with corporate formation, not contractual allocation of risk.  The logic of these decisions is brought into serious question by the Supreme Court of Virginia's 1996 decision in Gerald R. Moore & Sons v. Drewry.  That case held that an individual engineer could not be liable in negligence based on a contract with the engineer's corporate employer (previously discussed in our economic loss series).  Thus, in the very context of corporate versus individual liability that the statute was written for, the Supreme Court of Virginia ignored the statute.  Nevertheless, the courts above used the statute language to wipe out contractually negotiated and agreed to allocations of risk.

There is no retroactivity provision in the statute and the statute involves an amendment and re-enactment of the corporate statute.  Thus, it looks to me like this will only apply prospectively.  Whether that will mean to contracts entered into after the effective date, litigation filed after the date, or motions heard after the date will likely be a matter of some discussion.  We will have to see what happens with contracts and cases in the interim, but this is certainly a very welcome development for those in the design professional community.

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Waldo Jaquith

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    Timothy Hughes is the managing shareholder of Bean, Kinney & Korman. He also represents clients in construction and commercial litigation, as well as corporate, contracts and general business matters. With over 20 years ...