Johnson Nathan Strohe, P.C. v. MEP Eng'g, Inc.

• Decision Date: 23 September 2021
• Docket Number: Court of Appeals No. 20CA0950
• Citation: 2021 COA 125,501 P.3d 826
• Parties: JOHNSON NATHAN STROHE, P.C., f/k/a JG Johnson Architects, Plaintiff-Appellant, v. MEP ENGINEERING, INC., Defendant-Appellee.
• Court: Colorado Court of Appeals

501 P.3d 826

2021 COA 125

JOHNSON NATHAN STROHE, P.C., f/k/a JG Johnson Architects, Plaintiff-Appellant,

v.MEP ENGINEERING, INC., Defendant-Appellee.

Court of Appeals No. 20CA0950

Colorado Court of Appeals, Division VI.

Announced September 23, 2021

Cardi & Schulte, LLC, Timothy M. Schulte, Daniel V. Woodward, Greenwood Village, Colorado, for Plaintiff-Appellant.

SGR, LLC, John D. Hayes, Denver, Colorado, for Defendant-Appellee

Opinion by JUDGE BERGER

¶ 1 This case requires us to determine the validity of a limitation of liability clause in a contract between Johnson Nathan Strohe, P.C. (the architect) and MEP Engineering, Inc. (the engineer). The district court concluded that the limitation in favor of the engineer was clear and enforceable, capping the amount of recoverable damages in the architect's tort action against the engineer.

The architect contends, as he did in the district court, that limitations of liability should be strictly construed in the same manner as exculpatory agreements, and that the provision in this case is void because it is ambiguous.

¶ 2 We conclude that the language of the limitation is ambiguous; therefore, we reverse the district court's contrary conclusion. But we also hold that limitations of liability are not subject to the same rules of construction and invalidity as exculpatory agreements, so the limitation here is not void simply because it is ambiguous. On remand, the district court must determine the meaning of the limitation of liability provision, using traditional methods of determining disputed issues of fact. Only then may the district court enter an appropriate judgment.

I. Relevant Facts and Procedural History

¶ 3 The architect designed an apartment building in Denver and, on behalf of the project, hired the engineer "to provide mechanical, plumbing and electrical professional engineering services" for the building under a signed agreement. The engineer drafted the contract, which was signed by the architect without any changes relevant here. In a section entitled "Risk Allocation," the contract states as follows:

Limitation of Liability: In light of the limited ability of the Engineer to affect the Project, the risks inherent in the Project, and of the disparity between the Engineer's fees and the potential liability exposure for problems or alleged problems with the Project, the Client agrees that if the Engineer should be found liable for loss or damage due to a failure on the part of MEP-ENGINEERING, INC. such liability shall be limited to the sum of two thousand dollars ($2,000 or twice The Engineer's fee whichever is greater) as consequential damages and not as penalty, and that is liability exclusive.

¶ 4 The architect alleged that, as construction neared completion and the engineer was close to finishing its work, the owner and architect discovered substantial problems with the building's heating and hot water systems. According to the architect, the engineer admitted that it erred in designing those systems. The engineer then designed and implemented repairs. Later, the architect discovered additional problems, which required additional repairs. The architect employed a different firm for those repairs.

¶ 5 The owner of the apartment building initiated an arbitration proceeding against the architect stemming from the errant design of the heating and hot water systems. The engineer was not a party to the arbitration, probably because the engineer was not a party to the arbitration agreement. The arbitrator awarded the owner $1.2 million in damages against the architect.

¶ 6 The architect then sued the engineer for its alleged negligence, seeking to recover the amount for which it was found liable in the arbitration. The architect moved under C.R.C.P. 56(h) for a legal determination of the validity of the limitation of liability provision. The architect contended that the limitation is "too vague, confusing, and ambiguous to be enforceable."

¶ 7 Rejecting the architect's contentions, the district court concluded that the limitation is unambiguous and enforceable: "[T]here is only one plausible interpretation of this clause – [the engineer's] liability to [the architect] for any negligence on the part of [the engineer] is limited to $2,000 or twice [the engineer's] fee, whichever is greater." The district court interpreted the provision as follows:

[T]he Court finds the parties entered into an agreement intending to allocate the risk of the project between them and to limit [the engineer's] liability. The heading of paragraph five of the "General Provisions" document states in all capital letters – RISK ALLOCATION. This language is straightforward and obvious.... In addition, the phrase immediately below this heading is "Limitation of Liability." Again, this language is straightforward and obvious and reflects the parties’ desire in no uncertain terms to limit the liability of [the engineer]. The intent of the parties is further reinforced by the first full sentence immediately after this phrase. This sentence explains why the parties are allocating the risk between them and limiting [the engineer's] potential liability – [the engineer] has limited ability to affect the Project, there are inherent risks in the Project, and there is a disparity between [the engineer's] fees (i.e. $96,500.00) and its potential liability exposure (prophetically in this case at least $1.2 million).

Finally, after outlining the reasons why they are agreeing to limit [the engineer's] liability, the parties set forth the actual terms of that limitation – "the Client agrees that if the [e]ngineer should be found liable for loss or damage due to a failure on the part of [the engineer], such liability shall be limited to the sum of two thousand dollars ($2,000.00 or twice [t]he [e]ngineer's fee whichever is greater) as consequential damages and not as penalty, and that is liability exclusive." In short, the amount of any damages to be recovered from [the engineer] is capped at a specific amount, constitutes the only permissible (i.e. exclusive) liability of [the engineer] to [the architect], and is not considered a "penalty" which could run afoul of the rule that stipulated contract damages cannot operate as a penalty.

....

Bottom line, the Court concludes the language of the disputed provision reflects the intent of the parties to allocate the risk of the project between them, the provision is enforceable, and there is only one plausible interpretation of this clause ....

(Emphasis in original.)

¶ 8 The engineer then moved for leave to deposit $252,720, funds equaling twice its contractual fee (plus interest), into the court's registry and for dismissal with prejudice. In addition to continuing to contend that the limitation of liability is void, the architect opposed the motion on two grounds. First, the architect argued that the engineer's repairs fell outside the scope of the contract, so damages stemming from those repairs are not capped by the limitation of liability. Second, the architect argued that the limitation does not address costs or fees. Therefore, the architect argued that the engineer's deposit of twice its fee into the court registry did not moot the case.

¶ 9 The court disagreed and granted the engineer's motion to dismiss the case with prejudice.

II. The Limitation of Liability is Ambiguous

¶ 10 The architect contends that the district court erred by concluding that the limitation of liability provision is clear and unambiguous. We agree.

A. Law

¶ 11 "The interpretation of a contract presents a question of law." Sch. Dist. No. 1 v. Denver Classroom Tchrs. Ass'n , 2019 CO 5, ¶ 11, 433 P.3d 38. Our review is therefore de novo. Id.

¶ 12 "Our primary aim in contract interpretation is to ascertain and implement the intent of the parties." Fed. Deposit Ins. Corp. v. Fisher , 2013 CO 5, ¶ 11, 292 P.3d 934. "We ascertain the parties’ intent ‘primarily from the language of the instrument itself.’ " Denver Classroom Tchrs. , ¶ 12 (quoting Rocky Mountain Expl., Inc. v. Davis Graham & Stubbs LLP , 2018 CO 54, ¶ 59, 420 P.3d 223 ). We generally afford words in a contract their plain meaning. USI Props. E., Inc. v. Simpson , 938 P.2d 168, 173 (Colo. 1997). But legal terms of art "and terms of a similar nature should be interpreted in accord with their specialized or accepted usage." Antero Res. Corp. v. S. Jersey Res. Grp., LLC , 933 F.3d 1209, 1218 (10th Cir. 2019) (citation omitted); see People ex rel. Rein v. Jacobs , 2020 CO 50, ¶ 43, 465 P.3d 1 ; DISH Network Corp. v. Altomari , 224 P.3d 362, 368 (Colo. App. 2009).

¶ 13 "If the contract is complete and free from ambiguity, we deem it to represent the parties’ intent and enforce it based on the plain and generally accepted meaning of the words used." Denver Classroom Tchrs. , ¶ 14. Contract language is ambiguous if it is fairly susceptible of more than one reasonable meaning. Id. ; Rhino Fund, LLLP v. Hutchins , 215 P.3d 1186, 1190 (Colo. App. 2008).

¶ 14 "[T]he meaning of a contract is found by examination of the entire instrument and not by viewing clauses or phrases in isolation." Fisher , ¶ 11 (quoting U.S. Fid. & Guar. Co. v. Budget Rent-A-Car Sys., Inc. , 842 P.2d 208, 213 (Colo. 1992) ). We review contracts in their entirety, "seeking to harmonize and to give effect to all provisions so that none will be rendered meaningless." Copper Mountain, Inc. v. Indus. Sys., Inc. , 208 P.3d 692, 697 (Colo. 2009) (citation omitted); see also Rhino Fund , 215 P.3d at 1190. "Each word in an instrument is to be given meaning if at all possible." Budget Rent-A-Car , 842 P.2d at 213.

B. Application

¶ 15 The district court did not review the limitation of liability provision in its entirety, nor did the court give effect to all parts of the provision. Nowhere in the court's analysis did it address the clause stating "such liability shall be limited ... as consequential damages." This was error.

¶ 16 Accounting for the clause about consequential damages,...