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New Arizona Case: Liability Limitation in Contract Upheld

Torts – Defenses Limitation of Liability Clauses & Assumption of the Risk

1800 Ocotillo, LLC v. The WLB Group, Inc., 542 Ariz. Adv. Rep. 11 (Az Sup. Ct. November 3, 2008) (Justice Bales). LIMITATION OF LIABILITY CLAUSE IN CONTRACT LIMITING DAMAGES FOR NEGLIGENCE OF SURVEYOR TO THE SURVEYOR'S FEES DID NOT VIOLATE PUBLIC POLICY AND DID NOT CONSTITUTE AN "ASSUMPTION OF THE RISK" CONSTITUTIONALLY REQUIRING A JURY TRIAL.

The WLB Group entered into a contract with the 1800 Ocotillo Development Company to provide surveying and engineering services related to the construction of townhouses near a canal.

Due to alleged negligence in the survey work the City of Phoenix denied Ocotillo's building permits.

Ocotillo sued WLB claiming a right to recover its increased costs from construction delays and the necessity of obtaining additional engineering services and designs due to WLB's negligent survey. WLB responded claiming its damages were limited by contract to the amount of its surveying fees. The contract stated that “the liability of WLB's . . . from any negligent acts, errors and/or omissions of WLB . . . is limited to the total fees actually paid by the client . . ."

Ocotillo argued that this provision was unenforceable as contrary to public policy and that additionally the limitation of liability constituted an “assumption of the risk” and as such by virtue of Article 18, Section 5 of the Arizona Constitution was required to be submitted to a jury.

Ocotillo cited an anti-indemnity statute (Arizona Revised Statute §32-1159) in support of its argument that public policy should prohibit the application of the liability limitation clause at issue. The court rejected this argument stating that courts are always hesitant to declare any contractual provision invalid on public policy grounds. Looking to the specific anti-indemnity statute, the court found this statute really dealt with “hold harmless” clauses and promises to defend, essentially apples and oranges to the case at bar. More importantly, the court found that the rationale behind the statute was to avoid a situation where a tortfeasor could put an unreasonable cap on its potential liability for negligent acts. Here the surveying fees were not insubstantial and created a “substantial interest” in WLB to exercise due care in its work.

Finally, in addressing the public policy argument the court held there was no identifiable public policy that clearly outweighed the interest in enforcing the contact provision.

With respect to the assumption of the risk argument, the court analyzed the “legislative history” of the constitutional provision by looking to the constitutional convention where it was enacted. At the time of its drafting the common law posed assumption of the risk as an absolute bar to a plaintiff's recovery for injury. Delegates to the constitutional convention were particularly concerned that courts had used assumption of the risk, contributory negligence and the fellow-servant rule to bar recovery by injured employees against their employers. After first considering it, a proposal that the defense of assumption of risk be abolished the delegates ultimately compromised and agreed to mitigate its harsh affects by providing this defense would “be reserved to the jury in all cases whatsoever.” Similarly the delegates reserved to the jury the determination of the defense of contributory negligence and abolished the fellow-servant rule while prohibiting agreements that released or discharged employers from liability for injury to their employees. As such, the “assumption of the risk” principle applies as a defense that effectively relieves a defendant from any duty of care by completely barring recovery by the injured party.

Accordingly, the Arizona Supreme Court interprets “assumption of the risk” as used in Article 18, Section 5, “to refer only to defenses that effectively relieve the defendant of any duty. It was the harsh consequence of such a defense that caused the framers to reserve its determination to the jury”. This concern is not implicated by agreements that reasonably limit rather than eliminate liability.” Further, the court found that there were actually benefits to allowing parties to enter into written agreements that define the damages in such a way as to make them more predictable in the commercial world. The limitation of liability provision at issue here did not purport to relieve WLB of all liability nor did it have that effect. It did not abrogate WLB's duty toward Ocotillo but instead limited to recoverable damages if the duty was breached. As such this clause did not constitute “assumption of the risk” under the Arizona Constitution.

New Arizona Case: Liability Limitation in Contract Upheld
Posted by: Ted Schmidt
December 04, 2008

Torts – Defenses Limitation of Liability Clauses & Assumption of the Risk

1800 Ocotillo, LLC v. The WLB Group, Inc., 542 Ariz. Adv. Rep. 11 (Az Sup. Ct. November 3, 2008) (Justice Bales). LIMITATION OF LIABILITY CLAUSE IN CONTRACT LIMITING DAMAGES FOR NEGLIGENCE OF SURVEYOR TO THE SURVEYOR'S FEES DID NOT VIOLATE PUBLIC POLICY AND DID NOT CONSTITUTE AN "ASSUMPTION OF THE RISK" CONSTITUTIONALLY REQUIRING A JURY TRIAL.

The WLB Group entered into a contract with the 1800 Ocotillo Development Company to provide surveying and engineering services related to the construction of townhouses near a canal.

Due to alleged negligence in the survey work the City of Phoenix denied Ocotillo's building permits.

Ocotillo sued WLB claiming a right to recover its increased costs from construction delays and the necessity of obtaining additional engineering services and designs due to WLB's negligent survey. WLB responded claiming its damages were limited by contract to the amount of its surveying fees. The contract stated that “the liability of WLB's . . . from any negligent acts, errors and/or omissions of WLB . . . is limited to the total fees actually paid by the client . . ."

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