By Michael C. Loulakis, Lauren P. McLaughlin, and Ashley P. Cullinan
Parties involved in negotiating design and construction contracts routinely include clauses that attempt to limit their liability in some way, shape, or form. Given the importance of these clauses, one would think that they would always be crystal clear, so that all parties would know the parameters and extent of the liability limitation.
Unfortunately, far too often these clauses are not clear, resulting in the parties fighting about what each intended. If these clauses were the result of negotiations, that means that the court or arbitration panel will likely be listening to testimony and reviewing negotiation documents to determine what the parties were trying to accomplish.
This is precisely what happened in a case that is in federal district court in Virginia: BAE Systems Ordnance Systems Inc. v. Fluor Federal Solutions LLC. After considering competing motions for partial summary judgment on limitation of liability language, the court ruled that the liability clause was not applicable to the disputes before it, nor was it enforceable under Virginia law.
The case
The case involves a contract between BAE and Fluor at the Radford Army Ammunition Plant in Radford, Virginia. The Army awarded BAE a contract in 2012 to design and build a new nitrocellulose production facility at the arsenal. Shortly after the award, BAE subcontracted the design and construction of the facility to a third party.
BAE terminated that subcontract in January 2015 as a result of disputes over delays and cost overruns. BAE then began the process of procuring another design-builder for the facility, ultimately entering into a $246 million subcontract with Fluor in December 2015. The subcontract called for the work to be completed by July 30, 2018.
Fluor reached substantial completion in February 2021, and the parties had major disagreements over what caused this delay and who was responsible. BAE paid the Army for continued maintenance of the existing nitrocellulose facility and as an incentive for the Army not terminating its contract to manage the Radford arsenal, per court documents. BAE filed suit in Virginia federal court against Fluor for those costs. Fluor filed a counterclaim for the changes that Fluor claims BAE directed or that Fluor contends were incorporated into the work under the subcontract.
One of the principal issues in the suit was the impact of three limitations of damages clauses in the subcontract. All three LOD clauses stated that “except as otherwise provided in this Subcontract, damages and remedies ... for all claims ... shall be limited to $30M.” Two of the LOD clauses defined the $30 million as: “the value including all changes and the maximum liability for damages,” while the third LOD clause did not define the $30 million.
BAE filed a motion for partial summary judgment, asking the court to find that the LOD clauses unambiguously limited Fluor’s damages counterclaims to $30 million. Fluor also filed motions for partial summary judgment, asking the court to find that: (a) there was no limitation on its damages; and (b) the LOD clauses were not enforceable under Virginia law.
The ruling
The court’s decision was based upon several long-standing principles of contract interpretation. It first stated that Virginia law adheres to the “plain meaning rule.” This means that when a court determines an agreement is plain on its face and unambiguous in its terms, the court will not look to other evidence in considering the contract’s meaning. As stated by the court: “The cardinal rule of contract interpretation is that the intent of the parties as expressed in the contract controls.”
The court also emphasized that: “the fundamental canon of contract construction (is) that ‘a specific provision of a contract governs over one that is more general in nature.’” This means that when there are two or more conflicting contractual provisions, the provision that is “specially directed to a particular matter controls” over that which is “general in its terms.”
The court determined that the subcontract was unambiguous and that it did not support BAE’s position that Fluor’s recovery could be limited to $30 million. The court based this decision on the fact that all the LOD provisions were limited by the phrase “except as otherwise provided in this Subcontract.” The court concluded that this language necessarily implied that there was something else in the subcontract that had to be considered when evaluating the LOD provisions.
The court found that the subcontract’s changes clause was that language. This clause unambiguously provided that if there was a change made by BAE within the general scope of the contract, there “shall be an equitable adjustment.”
The court held that: “the changes themselves are not damages, rather, as the Subcontract makes clear, they are an equitable adjustment made by modifying the Subcontract.” The changes clause also stated: “nothing contained herein shall (affect) the right of the Parties to an equitable adjustment by reason of the change, pursuant to this clause.”
Consequently, this specific clause governed over the general LOD clause and precluded BAE from being able to rely upon the $30 million cap.
Importantly, the court held that even if it found the LOD provisions applicable, those provisions were null and void under Virginia law. Virginia has a statute that precludes a subcontractor from waiving its right to assert claims for demonstrated additional costs, and the court concluded that this statute was applicable here.
The analysis
This case involves two highly sophisticated parties, and they undoubtedly had significant discussions and negotiations over the LOD clauses. However, because the subcontract as a whole was considered unambiguous by the court, given the interplay of the LOD and changes clauses, the evidence of those discussions and negotiations could not be considered in interpreting the effect of the $30 million cap. Importantly, the conclusion might have been different through the lens of another judge or an arbitration panel, particularly if it wanted to understand what the parties were thinking about when they conceived of the liability cap.
The Virginia statute is not unusual, as it is a way legislatures try to protect subcontractors, who are generally in a poor bargaining position, from being forced to accept contractual waiver language from a general contractor. Again, the parties in this case are among the biggest corporations in the country, and it is likely that there was equal bargaining power, but that does not matter. The statute says what it says, and that means that BAE could not limit its liability for its changes regardless of the LOD clause.
Finally, it is worth noting that these LOD clauses were anything but typical. BAE said that Fluor was not able to make claims against it for more than $30 million in the aggregate. Taken at face value, this means that BAE could make whatever changes it wanted and have its liability capped. Because the subcontract was deemed unambiguous by the court, we are not privy to the negotiations. But it would be fascinating to know what the parties had in mind at the time they signed the subcontract.
Michael C. Loulakis is the president and CEO of Capital Project Strategies LLC in Reston, Virginia. Lauren P. McLaughlin is a partner and Ashley P. Cullinan is an associate with Smith Currie Olles LLP in Tysons, Virginia.
This article first appeared in the January/February 2025 issue of Civil Engineering as “Liability Caps May Not Be as Enforceable as You Think.”
