LAW: The Contractor's Side

Provisions interpreted differently

Article December 28, 2000
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In many design-build contracts or other “fast track” types of contracts, the owner attempts to shift as much risk as it can to the contractor. In return, many contractors attempt to negotiate “maximum liability” provisions, which at least cap the risk.

Those concepts have for several years been dealt with in major power plant construction projects and other heavy industrial construction projects. Recently, they have become part of the negotiation process in design-build projects. The meaning of words used to describe a contractor’s maximum liability is a subject of interpretation. Union Oil Company v. John Brown E & C, Inc., 1995 WL 549091 (N.D. Ill.), a recent case decided by a federal district court in Illinois, highlights the interpretation issue.

In April of 1989, Union Oil Company of California (Unocal) entered into a “cost reimbursable contract” with John Brown, Inc. (JBI) for the construction of a polymer plant. Unocal sued JBI for damages arising out of its design and construction of the plant. The issue before the court involved a determination of JBI’s liability cap.

The salient term of the contract was Section 9.16, which provided, in pertinent part:
(g) [JBI’s] maximum aggregate liability to Unocal with respect to subsections 9.16(a) through 9.16(f) above, shall not exceed the proceeds of the applicable insurance coverages plus 80%of the aggregate fee paid to [JBI]. . .

Avoiding limitations

In 1990, JBI agreed to limit its total fee to $415,000. Thereafter, in a letter dated June 17, 1991, Mr. G.C. Dohm of JBI wrote to Unocal indicating they agreed to credit 800of JBI’s fee, or $332,000, to Unocal. John Dietzman, a Unocal vice president, acknowledged that JBI informed him it was “willing to totally forfeit the fee.” JBI submitted that this “credit” or “forfeit” of its fee to Unocal equals the maximum amount of damages Unocal was entitled to recover under Section 9.16 of the contract. Because the only count remaining in this litigation, Count I, is a breach of contract claim, JBI argued that it was entitled to summary judgment. In the alternative, JBI also pointed to Section 9.16’s exclusion of the availability of “special, indirect or consequential damages.”

In order to avoid the Section 9.16 limitations on liability, Unocal argued they were not applicable to its breach of contract claim because it alleged gross negligence on the part of JBI, one of the exceptions to the limitations on JBI’s liability. Unfortunately for Unocal, the court had previously dismissed Unocal’s claims for gross negligence, noting that gross negligence had nothing to do with the breach of contract claim. Instead, it was a “tort” theory.

Under Counts II, III and IV of its complaint, Unocal sought damages against JBI for negligent misrepresentation, negligence and gross negligence. The court had already dismissed those counts because the damages Unocal sought—delay, cost overruns, loss of business opportunities—were contract, as opposed to tort, damages and Unocal had no legitimate tort claims. Thus, Unocal’s claim for gross negligence had long since been disposed of, and it could not be resurrected under the guise of the remaining breach of contract claim.

The court found Unocal was simply attempting to ward off summary judgment by converting its breach of contract claim into the gross negligence claim the court had already dismissed, without any allegations or evidence to support its attempt. Indeed, in the previous dismissal proceedings, Unocal essentially admitted that its damages were due to breach of contract, not to tortious conduct.

Lacking evidence

Because Unocal was left with only a breach of contract claim, the limitation of JBI’s liability to 808of its fee was applicable. Summary judgment was appropriate up to this point. Beyond that, however, the court was unconvinced, based on the record, to rule as a matter of law that JBI’s liability had already been satisfied. There was no record of any credit to Unocal’s account before the court. The court noted that the suggestion in the letter that the fee be waived does not necessarily mean it was in fact waived. The only evidence the court had before it was JBI’s statement that it was willing to waive its fee. Thus, that matter had to be determined later.

This case presents many interesting points to be considered by parties entering into design-build contracts. First, JBI negotiated a clear maximum liability clause. In fact, its maximum exposure was limited to its insurance coverage plus 80 of its fee. Unocal either did not consider the potential damage it might face or was willing to take the risk. When the damage far exceeded the maximum liability, Unocal tried every theory possible to avoid the maximum clause. The court saw through its effort and found the damages sought to be limited by the maximum liability clause. Design-build contractors should seek to limit their liability to an insurable risk or some reasonable amount above the amount of insurance coverage.

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