1800 Ocotillo, LLC v. Wlb Group, Inc.

• Decision Date: 03 November 2008
• Docket Number: No. CV-08-0057-PR.,CV-08-0057-PR.
• Citation: 219 Ariz. 200,196 P.3d 222
• Parties: 1800 OCOTILLO, LLC, an Arizona limited liability company, Plaintiff/Appellant, v. The WLB GROUP, INC., an Arizona corporation, Defendant/Appellee.
• Court: Arizona Supreme Court

196 P.3d 222

219 Ariz. 200

1800 OCOTILLO, LLC, an Arizona limited liability company, Plaintiff/Appellant, v.The WLB GROUP, INC., an Arizona corporation, Defendant/Appellee.

No. CV-08-0057-PR.

Supreme Court of Arizona, En Banc.

November 3, 2008.

Tiffany & Bosco, P.A.By Dow Glenn Ostlund, Tracy S. Morehouse, Kevin P. Nelson, Phoenix, Attorneys for 1800 Ocotillo, LLC.

Bonnett, Fairbourn, Friedman & Balint, P.C.By Jerry C. Bonnett, Meredith L. Vivona, Phoenix, Attorneys for the WLB Group, Inc.

Folk & Associates, P.C.By P. Douglas Folk, Phoenix, Attorneys for Amici Curiae American Council of Engineering Companies of Arizona, ASFE, AIA Arizona, and Arizona Professional Land Surveyors.

OPINION

BALES, Justice.

¶ 1This case involves a contract providing that a surveyor's liability to its client for negligently performing work may not exceed the surveyor's fees.We hold that the liability-limitation clause is neither contrary to public policy nor subject to Arizona's constitutional requirement that the defense of assumption of risk always be submitted to a jury.

FACTS AND PROCEDURAL HISTORY

¶ 2 The WLB Group, Inc. ("WLB"), a surveying and engineering firm, entered a professional services contract with 1800 Ocotillo, LLC("Ocotillo"), which planned to build townhouses near a canal.One of WLB's duties was to prepare a survey identifying boundary lines and rights-of-way.After WLB completed the survey, the canal operator claimed an interest in a right-of-way that was not accurately reflected in WLB's survey.This discrepancy caused the City of Phoenix to deny Ocotillo certain building permits.

¶ 3 Ocotillo sued alleging that WLB had negligently prepared the survey and thereby caused Ocotillo to incur increased costs from construction delays and additional engineering services and designs.WLB responded by arguing that any liability on its part was limited by a "Standard Condition" in the parties' contract.This provision states:

Client agrees that the liability of WLB, its agents and employees, in connection with services hereunder to the Client and to all persons having contractual relationships with them, resulting from any negligent acts, errors and/or omissions of WLB, its agents and/or employees is limited to the total fees actually paid by the Client to WLB for services rendered by WLB hereunder.

¶ 4 Ocotillo argued that this provision is unenforceable as contrary to public policy.Rejecting this argument, the trial court granted partial summary judgment limiting WLB's potential liability to the $14,242.00 in fees WLB had received.After the court entered judgment under Rule 54(b) of the Arizona Rules of Civil Procedure, Ocotillo appealed.

¶ 5The court of appeals agreed that the liability-limitation provision does not violate public policy.1800 Ocotillo, LLC v. WLB Group, Inc., 217 Ariz. 465, 474 ¶ 22, 176 P.3d 33, 43(App.2008).Addressing an argument that Ocotillo first raised on appeal, the court further held that the provision is subject to the requirement in Article 18, Section 5 of the Arizona Constitution that the "defense of assumption of risk" shall be submitted to the jury "in all cases whatsoever."Id. at 475 ¶ 28, 176 P.3d at 43.Accordingly, the court of appeals ruled that "[o]n remand, a jury must decide whether to enforce the limitation-of-liability provision set forth in the Contract and to what extent."Id.

¶ 6 WLB petitioned for review of the assumption of risk issue and Ocotillo cross-petitioned for review of the public policy issue.We granted both petitions because they concern important issues of statewide interest.We have jurisdiction under Article 6, Section 5(3) of the Arizona ConstitutionandArizona Revised Statutes("A.R.S.")§ 12-120.24(2003).

I.

¶ 7 Contract provisions are unenforceable if they violate legislation or other identifiable public policy.See Webb v. Gittlen, 217 Ariz. 363, 366 ¶ 13,369 ¶ 35, 174 P.3d 275, 278, 281(2008)(holding that public policy does not bar clients' assignment of negligence claims against their insurance agents);Restatement (Second) of Contracts§ 178(1981)."Legislation" as used here includes not only statutes but also constitutions, ordinances, and applicable regulations.Restatement (Second) of Contracts§ 178 cmt. a. In determining whether a provision is unenforceable, courts balance the interest in enforcing the provision against the public policy interest that opposes enforcement.Id. cmt. b. Analysis of the weight of the public policy interest generally focuses on the extent to which enforcement of the term would be injurious to the public welfare.Id.

¶ 8 Courts, however, are hesitant to declare contractual provisions invalid on public policy grounds.See15 Grace McLane Giesel, Corbin on Contracts§ 79.3, at 18(rev. ed. 2003)("[C]ourts generally have acted cautiously in declaring a contract contrary to public policy.").Our law generally presumes, especially in commercial contexts, that private parties are best able to determine if particular contractual terms serve their interests.SeeSalt River Project Agric. Improvement & Power Dist. v. Westinghouse Elec. Corp.("SRP"), 143 Ariz. 368, 375, 383, 694 P.2d 198, 205, 213(1984).Society also broadly benefits from the prospect that bargains struck between competent parties will be enforced.SeeRestatement (Second) of Contracts§ 178 cmt. b ("[T]he law[ has a] traditional interest in protecting the expectations of the parties.").Accordingly, absent legislation specifying that a contractual term is unenforceable, courts should rely on public policy to displace the private ordering of relationships only when the term is contrary to an otherwise identifiable public policy that clearly outweighs any interests in the term's enforcement.Id.§ 178.

A.

¶ 9 In arguing that the liability limitation is unenforceable, Ocotillo cites an anti-indemnity statute governing architect-engineer professional service contracts and other statutes regulating certain forms of business organizations.None of these statutes, however, declares that a liability-limitation provision is unenforceable.

¶ 10 The anti-indemnity statute provides:

A covenant, clause or understanding in, collateral to or affecting a construction contract or architect-engineer professional service contract that purports to indemnify, to hold harmless or to defend the promisee from or against liability for loss or damage resulting from the sole negligence of the promisee or the promisee's agents, employees or indemnitee is against the public policy of this state and is void.

A.R.S. § 32-1159(2008);see alsoA.R.S. § 34-226(2000)(similar provision regarding contracts for construction or improvement of public buildings).

¶ 11 By its terms, A.R.S. § 32-1159 applies only to agreements to "indemnify,""hold harmless," or "defend" the promisee for its sole negligence.Agreements to indemnify or hold harmless are essentially the same and require one party"[t]o absolve (another party) from any responsibility for damage or other liability arising from the transaction."Black's Law Dictionary749, 783-84 (8th ed. 2004).Provisions that impose a duty to "defend" require a party to "deny, contest, or oppose (an allegation or claim)."Id. at 450.In short, A.R.S. § 32-1159 concerns attempts to shift all liability for one's own negligence to another party.SeeValhal Corp. v. Sullivan Assocs.,44 F.3d 195, 202(3d Cir.1995)("[A]n indemnity clause holds the indemnitee harmless from liability by requiring the indemnitor to bear the cost of any damages for which the indemnitee is held liable."(emphasis added)).

¶ 12 The policy underlying the anti-indemnification statute clarifies why the distinction between indemnity and liability limitation is important.Anti-indemnification statutes are primarily intended to prevent parties from eliminating their incentive to exercise due care.Seeid. at 203-07.Because an indemnity provision eliminates all liability for damages, it also eliminates much of the incentive to exercise due care.

¶ 13 The provision in the WLB/Ocotillo contract does not completely insulate WLB from liability, as would an indemnity or hold harmless provision, nor does it require Ocotillo to defend WLB.The provision merely limits liability.

¶ 14 Although it is possible that a limitation of liability provision could cap the potential recovery at a dollar amount so low as to effectively eliminate the incentive to take precautions, this is not the case here.Under the Ocotillo contract, WLB remains liable for the fees it earns.The fees undoubtedly were WLB's main reason for undertaking the work.Thus, WLB retains a substantial interest in exercising due care because it stands to lose the very thing that induced it to enter into the contract in the first place.SeeMarbro, Inc. v. Borough of Tinton Falls,297 N.J.Super. 411, 688 A.2d 159, 162-63(Ct. Law Div.1996)(holding that a cap on liability equal to total fees earned "provided adequate incentive to perform").Because the clause does not eliminate WLB's liability, but instead caps it by an amount that substantially preserves WLB's interest in exercising due care, A.R.S. § 32-1159 does not apply.

B.

¶ 15 Ocotillo also cites statutes regulating various forms of business organizations.Under A.R.S. § 10-2234(2004), a shareholder of a professional corporation "is personally and fully liable and accountable for any negligent or wrongful act or misconduct" the shareholder commits while rendering services on behalf of the professional corporation.Similarly, A.R.S. § 29-846(1998) states that "[e]ach member, manager or employee performing professional services" on behalf of a limited liability company "shall remain personally liable for any results of the negligent or wrongful acts, omissions or misconduct committed by him."Finally, A.R.S. § 29-1025(A)(1998) generally provides that a partnership "is liable for loss or injury caused to a person . . . as a...