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66 VMD Associates, LLC v. Melick-Tully and Associates, P.C.

A-4008-09T3 (N.J. Super. App. Div. 2011) (Unpublished)

CONTRACTS; EXCULPATION — Although exculpation clauses are usually disfavored in professional service contracts, they do not violate public policy and therefore they will be reviewed with an eye to establishing whether the damage limit provides sufficient incentive for the professional to perform its obligations under the contract.

A commercial developer contracted to purchase a lot. The property was environmentally contaminated and the developer then hired an environmental consultant to provide a remediation plan. There were five contracts with the consultant. Each limited the consultant’s liability for professional negligence to $25,000. The consultant issued a report estimating the remediation cost to be between $13,000 and $17,000. Five years later, the developer still had not performed any remediation. Instead, it contracted to resell the property. Before that closing was to take place, the buyer rightfully canceled the sale because its tests showed that remediation costs could exceed $100,000. The developer then sued the consultant for $2,000,000, alleging professional negligence. The consultant moved for summary judgment on the issue of damages, arguing that its contract liability was limited to $25,000. The lower court granted summary judgment.

The developer appealed, arguing that the limitation of liability clause was invalid because it was unsigned, inequitable, provided inadequate economic compulsion for the company to perform diligently, and violated public policy. The developer contended that limitation of liability clauses are unenforceable where the potential loss resulting from the negligence performance greatly exceeds the limitation on damages. After comparing the limitation of liability clauses against the expected compensation under the contract, the Appellate Division disagreed, finding that the consultant had ample incentive to perform diligently. Even though the consultant had limited its liability to only twenty-five percent more than the total contract price, the consultant still was under sufficient economic compulsion to complete its work diligently.

The developer also argued that exculpatory clauses in professional service contracts violate public policy. The Court agreed that exculpation clauses are usually disfavored in professional service contracts, but found the limitation of liability clause in the present case was not low enough to be considered an exculpatory clause. Therefore, the contract did not violate public policy.

Next, the developer argued that the contract provisions at issue violated New Jersey’s public policy favoring remediation of contaminated sites. Here, however, the consultant had not caused the contamination and did not own the property; therefore, it was not responsible for the cost of remediation. Thus, enforcement of the contract would not impact New Jersey’s public policy in favor of remediation.

The Court then addressed the developer’s argument that there was an issue of fact as to whether the parties had equal bargaining power. The Court found that both parties had equal bargaining power because the parties each was a competent commercial entity and each was well versed in business transactions and each had legal representation. The developer contended that it would be inequitable for it to bear the costs of the consultant’s negligence because it could not adequately insure itself against such losses. The Court ruled that the contract did not contain an exculpatory clause and the consultant’s ability insure against potential losses arising from a breach of contract was irrelevant.

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