Indemnification provisions are frequently utilized in construction contracts to shift the liability for loss from one contracting party to another.1 Under Pennsylvania law, such provisions are generally valid and enforceable with a notable exception.2 Under § 491 of the Pennsylvania Statutes, an architect may not be indemnified or held harmless under any agreement with an owner, contractor, subcontractor or supplier for damages arising out of the architect’s professional services.3 Section 491 provides in relevant part:

Every covenant, agreement or understanding in, or in connection with any contract or agreement made and entered into by owners, contractors, subcontractors or suppliers whereby an architect, engineer, surveyor or his agents, servants or employees shall be indemnified or held harmless for damages, claims, losses or expenses including attorneys’ fees arising out of: (1) the preparation or approval by an architect, engineer, surveyor or his agents, servants, employees or invitees of maps, drawings, opinions, reports, surveys, change orders, designs or specifications, or (2) the giving of or the failure to give directions or instructions by the architect, engineer, surveyor or his agents, servants or employees provided such giving or failure to give is the primary cause of the damage, claim, loss or expense, shall be void as against public policy and wholly unenforceable.4

In enacting § 491, the Pennsylvania legislature prohibited architects from indemnifying themselves from any damages arising out of their activities on construction projects, even if that damage was not caused by negligence.5

An architect can attempt to limit its risk by including a limited liability provision in its contracts.6 Under Pennsylvania law, agreements limiting the liability of one party for the consequences of its own negligence are generally valid and enforceable.7 In fact, Pennsylvania courts have explicitly distinguished indemnity provisions that entirely insulate a party from liability from limitation of liability provisions that merely limit liability.8 Although the Pennsylvania Supreme Court has never considered whether the public policy behind § 491 applies to an architect’s limitation of liability provision, a federal court applying Pennsylvania law concluded that the public policy does not apply and such a provision is enforceable.9

In Valhal Corp. v. Sullivan Assocs., the U.S. Court of Appeals for the Third Circuit applied Pennsylvania law and held that where Valhal, a real estate developer, brought an action against its architect, Sullivan, for breach of contract, negligence, gross negligence and negligent misrepresentation, a provision in the parties’ construction contract that limited Sullivan’s liability to $50,000 was enforceable.10 In Valhal, paragraph 9 of the construction contract provided in part:

The OWNER agrees to limit the Design Professional’s liability to the OWNER and to all construction Contractors and Subcontractors on the project, due to the Design Professional’s professional negligent acts, errors or omissions, such that the total aggregate liability of each Design Professional shall not exceed $50,000 or the Design Professional’s total fee for services rendered on this project. Should the OWNER find the above terms unacceptable, an equitable surcharge to absorb the Architect’s increase in insurance premiums will be negotiated.11

In the lower court, Valhal successfully argued that paragraph 9 was unenforceable, because it violated the public policy against an architect limiting its liability for damages caused by its own negligence, the same public policy behind § 491.12

In reversing the decision of the lower court, the appellate court held that the public policy behind § 491 was inapplicable to a limitation of liability provision.13 In so holding, the court noted that Pennsylvania law does not equate indemnity provisions with limitation of liability provisions:

We are persuaded that limitation of liability clauses are not disfavored under Pennsylvania law; especially when contained in contracts between informed business entities dealing at arm’s length, and there has been no injury to person or property. Furthermore, such clauses are not subjected to the same stringent standards applied to exculpatory and indemnity clauses. Limitation of liability clauses are a way of allocating "unknown or undeterminable risks," [. . .] and are a fact of every-day business and commercial life. So long as the limitation which is established is reasonable and not so drastic as to remove the incentive to perform with due care, Pennsylvania courts uphold the limitation.14

The court noted that there is a "real difference" between a provision that insulates an architect from liability and one that merely places a limit upon its liability and, thus, the trial court erred in applying the stringent standards of § 491 to the clause between Valhal and Sullivan.15

Although Valhal has been cited favorably by Pennsylvania courts,16 no Pennsylvania court has yet applied its reasoning to a limitation of liability provision in an architect’s contract. Nonetheless, because § 491 flatly prohibits an architect from seeking contractual indemnification, a limitation of liability provision will provide some protection to an architect. This protection should be tempered, however, by the contractual nature of a limited liability provision. Such a provision will be applicable only to parties in privity with the architect. Given that the Pennsylvania Supreme Court recently broadened the class of potential plaintiffs who might seek damages from an architect to include those with no privity of contract,17 a limitation of liability provision, by itself, will not totally protect an architect. Nonetheless, such a provision is currently an important tool to protect an architect from claims arising on construction projects in Pennsylvania. |

Footnotes

1. 4-13 Steven G.M. Stein, CONSTRUCTION LAW § 13.17 (2005). Krass Plus Clothiers, Inc. v. Church’s Fried Chicken, 26 Phila. 434, 438 (C.C.P. Phila. 1993) (holding indemnity provision between an owner and a contractor to be enforceable); Bethlehem Steel Corp. v. Andco, Inc., 42 Pa. D. & C.3d 34, 42 (1986) (holding an indemnity provision between an owner and a contractor to be enforceable).

2. See, e.g., Greer v. City of Phila., 795 A.2d 376, 379 n.2 (Pa. 2002) (noting that Pennsylvania is in the minority of states that do not statutorily prohibit either indemnification generally or indemnification of a party for its own negligence).

3. 68 P.S. § 491.

4. Id.

5. Stein, supra note 1.

6. Paul B. Bech, Professional Licensing And Design-Build Contracting, 70 PA Bar Assn. Quarterly 35, 43 (Jan. 1999).

7. K&C, Inc. v. Westinghouse Elec. Corp., 263 A.2d 390, 393 (Pa. 1970); John B. Conomos, Inc. v. Sun Co., 831 A.2d 696, 704 (Pa. Super. Ct. 2003); Borden, Inc. v. Advent Ink Co., 701 A.2d 255, 262 (Pa. Super. Ct. 1997); Vasilis v. Bell of Pa., 598 A.2d 52, 54 (Pa. Super. Ct. 1991); N.Y. State Elec. & Gas Corp. v. Westinghouse Elec. Corp., 564 A.2d 919, 924 (Pa. Super. Ct. 1989).

8. DeFrancesco v. W. Pa. Water Co., 478 A.2d 1295, 1306 (Pa. Super. Ct. 1984).

9. See Valhal Corp. v. Sullivan Assocs., 44 F.3d 195, 204 (3d Cir. 1995).

10. Id. at 198 (reversing and dismissing Valhal’s claims, holding that the controversy did not meet the statutory requirement for diversity jurisdiction, because the limitation of liability provision capped damages at $50,000).

11. Id.

12. Id. at 201.

13. Id. at 202.

14. Id. at 203-04 (citing Topp Copy Products, Inc. v. Singletary, 626 A.2d 98, 99 (Pa. 1993) and Potts v. Dow Chemical Co., 415 A.2d 1220, 1221 (Pa. Super. Ct. 1980)). See also Longport Ocean Plaza Condo., Inc. v. Robert Cato & Assocs., 137 Fed. Appx. 464 (3d Cir. 2005) (distinguishing indemnity provisions from limitation of liability provisions).

15. Id. at 202-203 (citing DeFrancesco, 478 A.2d at 1306 and Posttape Assocs. v. Eastman Kodak Co., 537 F.2d 751, 755 (3d Cir. 1976)).

16. John B. Conomos, 831 A.2d at 704; Borden, 701 A.2d at 262.

17. Bilt-Rite Constrs. v. Architectural Studio, 866 A.2d 270 (Pa. 2005).

This article is for general information and does not include full legal analysis of the matters presented. It should not be construed or relied upon as legal advice or legal opinion on any specific facts or circumstances. The description of the results of any specific case or transaction contained herein does not mean or suggest that similar results can or could be obtained in any other matter. Each legal matter should be considered to be unique and subject to varying results. The invitation to contact the authors or attorneys in our firm is not a solicitation to provide professional services and should not be construed as a statement as to any availability to perform legal services in any jurisdiction in which such attorney is not permitted to practice.

Duane Morris LLP, among the 100 largest law firms in the world, is a full-service firm of more than 600 lawyers. In addition to legal services, Duane Morris has independent affiliates employing approximately 100 professionals engaged in other disciplines. With offices in major markets, and as part of an international network of independent law firms, Duane Morris represents clients across the United States and around the world.