Can a Professional Services Firm Limit its Liability by Contract? A Look at Texas, New Mexico, and Oklahoma Law
Prepared and presented by Freeman Law attorneys, Cory Halliburton and Clay McMillan
Freeman Law is privileged and proud to serve as outside counsel to various engineering, architectural, and other professional services firms. This segment of Freeman Law focus spans from protecting trade secrets in public information request proceedings to human resource and employment law counsel to strategic review and counsel regarding service agreements of all shapes and sizes. Through review and evaluation of thousands of contracts in many different business sectors, common and reoccurring party-negotiation and client risk-management consideration revolves around contractual provisions for indemnification and limitation of liability.
This Freeman Law Insights blog provides a high-level overview of whether, under Texas, New Mexico, and Oklahoma law, a professional services firm may contractually limit its liability pursuant to limitation of liability provision.
1. Short Answer: It Depends.
As these matters go, the answer is, well, it depends.
Each jurisdictions’ judiciary generally upholds limitation-of-liability provisions. But, if, under present circumstances the provision proves injurious to the public and against public policy, the provision may be unenforceable. Also, if the contract pertains to certain subject matters within each state’s respective statutory regimes, then specific analysis of those specific statutes is warranted to evaluate the potential enforceability of a limitation-of-liability provision.
Each state’s public policy analysis varies, and each state’s legislature has adopted specific ground rules applicable to specific contract subject matters. Moreover, the legal analysis may vary depending on the parties involved and their respective bargaining power. Also, if a governmental entity or agency is involved, then additional scrutiny is warranted for evaluating the terms of the agreement.
2. Texas Law.
Limitation-of-liability clauses are generally valid and enforceable. There is strong public policy in enforcing voluntary and knowing contracts under Texas law. Within Texas’ strong principles of freedom to contract are limitation-of-liability clauses, which are valid limited warranties forming the basis of the parties’ bargain. However, freedom of contract is not unbounded. Texas courts have found that parties do not have the right to enter into contracts that violate a strong public policy as expressed by statute.
In the absence of expressed direction from the Legislature, whether a promise or agreement will be unenforceable on public policy grounds will generally be determined by weighing the interest in enforcing agreements versus the public policy interest against such enforcement. Courts will consider the expectations of the parties and the value of certainty in enforcement of contracts generally. On the other hand, courts will also consider the extent to which the agreement frustrates important public policy. The appropriate test when considering whether a contract violates public policy is whether the tendency of the agreement is injurious to the public.
The key issue for the courts is whether a limitation of liability clause with a governmental body or otherwise violates public policy because it is or proves to be injurious to the public.
Also, a limitation-of-liability provision is many times connected with indemnity provisions. Under Texas law, a contract provision that purports to require the services firm to indemnify a government entity for its own negligence it is void. Texas Government Code section 2254.005 provides that a contract or an arrangement made in violation of this subchapter is void as against public policy. See also Tex. Gov’t Code § 2254.002(a) (defining governmental entity as a state agency or department; a district authority, county, municipality, or other political subdivision of the state; a local government corporation or another entity created by or acting on behalf of the political subdivision in the planning of a construction project; or a publicly owned utility).
Additionally, a governmental entity may require the contractor to indemnify or hold harmless the state from claims and liabilities resulting from the contractor’s negligence; however, the governmental entity may not require indemnification for its own negligence. See Tex. Gov’t Code § 2254.0031(a). If the government body is defined under the Texas Local Government Code, then a governmental agency cannot require an architect or engineer to indemnify the governmental agency for that agency’s negligence. See Tex. Loc. Gov’t Code § 271.904.
In summary, limitation-of-liability provisions are generally treated as valid and enforceable. There are grounds or circumstances when the provision may be unenforceable, and that determination is made on a case-by-case basis and in consideration of any existing or future public policy or legislative enactment. Careful consideration should be given to, among other things, the type and “strength” of the contracting parties, the value of the contract, and the proposed limit of liability.
3. New Mexico Law.
Under New Mexico law, parties are generally bound to their express, written contracts and are not excused from their duty to know these terms. Public works contracts involving a municipality are interpreted under the same rules that govern contracts involving private citizens.
However, a contract that violates public policy is unenforceable under New Mexico law. Generally, a limitation-of-liability clause is neither contrary to public policy nor unfair because the applicable contracting parties still bear substantial responsibility for their actions. Moreover, there is a strong public policy of freedom to contract which requires enforcement of contracts unless the contract clearly contravenes some law or public policy.
Whether a contract is against public policy is a question of law for the court to determine from all the circumstances of each case. It is clearly to the interest of the public that persons should not be unnecessarily restricted in their freedom to make their own contracts. Agreements are not void as being contrary to public policy, unless they are clearly contrary to what the legislature or judiciary has declared to be the public policy, or they manifestly tend to injure the public in some way.
Thus, under New Mexico law, the validity of a limitation-of-liability clause depends on whether the provision violates public policy as prescribed by the legislature or the courts.
New Mexico law contains a statute which voids construction contracts as against public policy when a contract attempts to indemnify, hold harmless, insure, or defend a party for its own negligence. See N.M. Stat. Ann. § 56-7-1 (2022). New Mexico courts have directly addressed whether a limitation-of-liability clause would implicate the New Mexico statute on indemnifying a party for its own negligence. The courts distinguish indemnity, exculpatory, and limitation-of-liability clauses with respect to the application of section 56-7-1 of the New Mexico Statutes. Some courts have held that the party seeking to void a limitation-of-liability provision must show that the terms of the contract were grossly unfair to constitute substantive unconscionability.
Substantive unconscionability can constitute a violation of public policy under New Mexico law. In this evaluation, some courts weigh various factors to determine whether public policy should operate to void a “contractual limitation of liability.”
The factors may include: (1) whether the businesses in issue are of a type generally thought suitable for public regulation; (2) whether the business involves a service of great importance to the public; (3) whether the business holds itself out as willing to perform the service for any member of the public; (4) whether the business possesses a decisive advantage of bargaining strength against the public; (5) whether the business confronts the public with a standardized adhesion contract of exculpation and makes no provision whereby a service-recipient may pay additional reasonable fees and obtain protection against negligence; and (6) as a result of the transaction, the service-recipient or purchaser is placed under the control of the service provider or seller, subject to the risk of carelessness by the seller or its agents.
In summary, a professional services firm contracting for a project in New Mexico is wise to evaluate all applicable statutory and common law (judicially-created) public policy doctrines and prescriptions. For example, the New Mexico Legislature has codified specific statutes designed to regulate, to some extent, equine activities, schools, hospitals, oil and gas, water, and others.
New Mexico’s common law is rather undeveloped compared to other states, like Texas. Texas courts have seen much more litigation in this arena due to the more vibrant professional services economy that exists in the Lone Star State than in New Mexico. Thus, a predicative analysis may suffer because New Mexico simply does not have the precedent and its courts tend to draw from any jurisdiction to make up for that lack of precedent. However, on the whole, New Mexico courts tend to uphold limitation-of-liability clauses under its reverence for freedom of contract.
4. Oklahoma Law.
Generally, Oklahoma law sustains contracts with limitation-of-liability clauses that are not unconscionable nor against public policy. If the clause limits liability for personal injury, which is to say it limits ordinary negligence, then the clause is usually deemed valid when the parties have equal bargaining power. The courts determine bargaining power by evaluating the importance of the subject matter to the physical or economic well-being of the party agreeing to the release, and the amount of free choice that party could have exercised when seeking alternative services.
Freedom of contract is an important aspect of Oklahoma society, but it may be limited by public policy. Under Oklahoma law, only a specific Oklahoma court decision, state legislative or constitutional provision, or a provision in the federal constitution that prescribes a norm of conduct for the state, can serve as a source of Oklahoma’s public policy. A contract violates public policy only if it clearly tends to injure public health, morals, or confidence in the administration of law, or if it undermines the security of individual rights with respect to either personal liability or private property. Courts will exercise their power to nullify contracts made in contravention of public policy only rarely, with great caution, and in cases that are free from doubt.
There are two general statutory provisions under Title 15 of the Oklahoma Code that appear to constitute the basis for a claim which provides a limit on liability is violative of public policy. Oklahoma Statute section 15-211 provides that contracts which are contrary to an express provision of law, contrary to the policy of express law, though not expressly prohibited, or otherwise contrary to good morals are unlawful. That statute states: “All contracts which have for their object, directly or indirectly, to exempt any one from responsibility for his own fraud, or willful injury to the person or property of another or violation of law, whether willful or negligent, are against the policy of the law.”
Depending on the nature of the contract, a different title and section of Oklahoma’s code may apply to the applicable service agreement or contract, thus the scope of this discussion is not all-encompassing.
Under Oklahoma law, a limitation-of-liability clause is generally deemed valid when it does not violate public policy nor is unconscionable. Like the law in New Mexico, the common law in Oklahoma is rather undeveloped with respect to service contracts containing limitation-of-liability clauses, not to mention when one party is a governmental entity. Therefore, the analysis lacks sufficient basis to predict the application of the law to any particular set of facts with the desired certainty that clients often seek.
The Oklahoma courts have not elaborated much on the unconscionability of limitation-of-liability clauses. But, courts primarily evaluate whether the contractual provision is unconscionable or against public policy. Also, in determining whether a limitation-of-liability provision should be enforced, the courts evaluate whether future damages are impracticable and extremely difficult to fix and whether the parties had equal bargaining power. Courts also factor in whether the party seeking to void a limitation-of-liability provision was in a “take-it-or-leave-it” position in the contract negotiation and whether the limitation-of-liability applies, by contract, to willful acts, intentional torts, or other unconscionable conduct that would implicate public policy considerations if the provision were enforced.
In summary, under Oklahoma law, the courts tend to uphold contracts containing limitation-of-liability clauses because, generally, the courts do not find such provisions violative of public policy nor unconscionable. However, public policy is usually set by the legislature and not the courts, although the courts have jurisdiction to create common law in this arena. Therefore, freedom to contract may be contravened by statutory provisions or judicial opinion.
In closing, Freeman Law is certainly privileged and proud to serve as outside counsel to engineering, architectural, and other professional services firms doing business in Texas and beyond. A limitation-of-liability framework in professional services agreements can serve to increase the value of the company, limit exposure to unknown but potential risks, and allow the services firm flexibility. It can provide assurance that its assets and human resource capital are protected and empowered while performing important and critical services for owners, clients, contractors, and others, including governmental entities.