We have all heard the saying that an ounce of prevention is worth a pound of cure. This holds true for litigation arising from construction projects where it is much easier and cheaper to avoid a large judgment through careful contract drafting on the front end. One important tool for doing so is a limitation of liability provision which is commonly found in construction contracts.
The South Carolina Supreme Court recently held in Maybank v. BB&T Corporation, that such provisions can extend to prohibiting an award of punitive damages. The potential for a punitive damages award in an amount many times a plaintiff’s actual damages is a serious concern for construction professionals, and the ability to contractually eliminate that risk is of great value. However, as Maybank makes clear, a limitation of liability provision must be carefully drafted to provide the greatest likelihood that a court will enforce the provision.
In Maybank, a customer entered into a contract with a bank for investment services, and later brought contract, tort, and South Carolina Unfair Trade Practices Act (“UTPA”) claims against a bank related to investment advice he received. A jury found for the customer on a number of the claims and awarded punitive damages and treble damages under the UTPA. The bank moved for a judgment notwithstanding the verdict as to the punitive damages award and the treble damages award, and the trial court denied the motions.
The contract between the customer and the bank contained a limitation of liability provision which read: “In no event shall Bank . . . be liable for any incidental, indirect, special, consequential or punitive damages.” The Court held that this language was an enforceable waiver of a customer’s right to recover punitive damages and reversed the trial court’s denial of the bank’s motion. In doing so, the Court rejected the trial court’s ruling that the contractual limitation was unenforceable because it violated public policy and was unconscionable.
While the Maybank decision establishes the enforceability of contractual punitive damages waivers in South Carolina, the decision indicates that such waivers may not be enforceable in all instances. The Court indicated that punitive damages waivers are unenforceable where they violate public policy or are unconscionable. Therefore, when drafting limitation of liability provisions and punitive damages waivers, factors to consider and address are:
- the sophistication of the parties and their relative bargaining powers;
- whether the contract is a form contract or is drafted for the transaction;
- whether the other party will have an opportunity to negotiate for the removal of the provision;
- the scope of the provision and what damages it permits the other party to recover;
- whether the provision is “one-sided” and applies only to the other party or equally restricts both parties’ rights;
- whether the provision is included with or tied to other provisions or is isolated as its own, stand-alone contract term;
- whether the contract contains a severability provision; and
- whether the provision is buried in the contract or highlighted and conspicuous.
While there are no guaranteed outcomes in litigation, careful consideration of these factors when drafting a limitation of liability provision will result in a provision that a court is much more likely to enforce.
The Court also considered whether the limitation of liability provision barred the jury’s award of treble damages under the UTPA. The Court held that the provision did not cover treble damages under the UTPA because it did not “specifically prohibit statutory or multiple damages.” The Court left undecided whether a limitation of liability provision that explicitly prohibits “statutory” or “multiple” damages will be enforced so as to bar an award of treble damages under the UTPA. Until the Court squarely decides this issue, contract drafters are left in limbo as to whether to include an explicit prohibition on “statutory” and “multiple” damages. One approach is to include those limitations based on the assumption that such a prohibition may be enforceable. The second approach is to leave those limitations out of the provision based on a perceived risk that should the Court find those limitations unenforceable, the Court may use their inclusion to declare the entire limitation of liability provision unenforceable.