1800 OCOTILLO LLC v THE WLB GROUP INC

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SUPREME COURT OF ARIZONA En Banc 1800 OCOTILLO, LLC, an Arizona limited liability company, ) ) ) Plaintiff/Appellant, ) ) v. ) ) THE WLB GROUP, INC., an Arizona ) corporation, ) ) Defendant/Appellee. ) ) ) ) __________________________________) Arizona Supreme Court No. CV-08-0057-PR Court of Appeals Division One No. 1 CA-CV 07-0037 Maricopa County Superior Court No. CV2000-021738 O P I N I O N Appeal from the Superior Court in Maricopa County The Honorable Peter B. Swann, Judge ________________________________________________________________ Opinion of the Court of Appeals, Division One 217 Ariz. 465, 176 P.3d 33 (App. 2008) VACATED AND REMANDED ________________________________________________________________ TIFFANY & BOSCO, P.A. By Dow Glenn Ostlund Tracy S. Morehouse Kevin P. Nelson Attorneys for 1800 Ocotillo, LLC Phoenix BONNETT, FAIRBOURN, FRIEDMAN & BALINT, P.C. By Jerry C. Bonnett Meredith L. Vivona Attorneys for the WLB Group, Inc. Phoenix FOLK & ASSOCIATES, P.C. Phoenix By P. Douglas Folk Attorneys for Amici Curiae American Council of Engineering Companies of Arizona, ASFE, AIA Arizona, and Arizona Professional Land Surveyors ________________________________________________________________ B A L E S, Justice ¶ 1 This 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 ), townhouses near a canal. which planned to build 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 survey. that was not accurately reflected in WLB s This discrepancy caused the City of Phoenix to deny Ocotillo certain building permits. ¶ 3 Ocotillo prepared the increased sued survey costs alleging and from thereby that caused construction engineering services and designs. WLB had Ocotillo delays and negligently to incur additional 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 2 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. trial court granted partial Rejecting this argument, the 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. ¶ 5 The limitation court provision of appeals does not agreed violate that public the liability- policy. 1800 Ocotillo, LLC v. WLB Group, Inc., 217 Ariz. 465, 474 ¶ 22, 176 P.3d 33, 43 (App. 2008). first raised on appeal, Addressing an argument that Ocotillo 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. ¶ 6 Id. WLB petitioned for review of the assumption of risk issue and Ocotillo cross-petitioned for review of the public 3 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 Constitution and Arizona 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. Contracts § 178 cmt. a. unenforceable, provision against enforcement. policy courts of generally the the public Id. cmt. b. interest enforcement In determining whether a provision is balance the Restatement (Second) of term interest policy in enforcing interest that the opposes Analysis of the weight of the public focuses would on be the extent injurious to to the which public welfare. Id. ¶ 8 Courts, however, are hesitant to declare contractual provisions invalid on public policy grounds. See 15 Grace McLane Giesel, Corbin on Contracts § 79.3, at 18 (rev. ed. 2003) ( [C]ourts generally have acted 4 cautiously in declaring a contract contrary presumes, to public especially in policy. ). commercial Our law contexts, generally that private parties are best able to determine if particular contractual terms serve their interests. See Salt 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. (Second) of traditional parties. ). Contracts interest in § 178 cmt. protecting b See Restatement ( [T]he the law[ expectations has a] of the 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 enforcement. clearly outweighs any interests in the term s Id. § 178. A. ¶ 9 In arguing unenforceable, Ocotillo that the cites liability an limitation anti-indemnity is statute governing architect-engineer professional service contracts and other statutes organizations. regulating certain forms business None of these statutes, however, declares that a liability-limitation provision is unenforceable. ¶ 10 of The anti-indemnity statute provides: 5 A covenant, clause or understanding in, collateral to or affecting a construction contract or architectengineer 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. § (similar 32-1159 (2008); provision see regarding also A.R.S. contracts § for 34-226 (2000) construction or improvement of public buildings). ¶ 11 agreements By to its terms, A.R.S. indemnify, § hold 32-1159 harmless, promisee for its sole negligence. applies or only defend to the 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. Dictionary 749, 783-84 (8th ed. 2004). Black s Law Provisions that impose a duty to defend require a party to deny, contest, or oppose (an allegation or claim). Id. at 450. 1159 concerns attempts to shift negligence to another party. all See In short, A.R.S. § 32- liability for one s own Valhal 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 6 clarifies why the distinction between indemnity and liability limitation primarily is important. intended to Anti-indemnification prevent parties incentive to exercise due care. indemnity provision eliminates from statutes eliminating See id. at 203-07. all liability for are their Because an 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 precautions, this is not the case here. incentive to take 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. See Marbro, Inc. v. Borough of Tinton Falls, 688 A.2d 159, 162-63 (N.J. Super. 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 7 exercising due care, A.R.S. § 32-1159 does not apply. B. ¶ 15 Ocotillo also cites statutes regulating various forms of business organizations. shareholder of a Under A.R.S. § 10-2234 (2004), a professional corporation is personally and fully liable and accountable for any negligent or wrongful act or misconduct the shareholder commits while rendering services Similarly, A.R.S. on behalf of the professional corporation. § 29-846 (1998) states that [e]ach member, manager or employee performing liability results professional company of misconduct the services shall remain negligent or committed by on behalf personally of a liable limited for any wrongful acts, omissions Finally, A.R.S. § him. or 29-1025(A) (1998) generally provides that a partnership is liable for loss or injury caused to a person . . . as a result of a [partner s] wrongful act or omission, or other actionable conduct in the course of the partnership s business or with its authority. ¶ 16 Ocotillo legislature s argues intent to that preclude their liability through contract. these statues professionals evidence from the limiting But these statutes do not address contractual limitations of liability. Sections 10-2234 and 29-846 establish that professionals who organize under them do not enjoy the same protections against personal liability that generally results from incorporation 8 or formation of a limited liability company. Section 29-1025(A) simply recognizes that a partnership is liable for the acts of the partners. is not a liability professional company, or corporation, a a professional partnership. It is a WLB limited traditional corporation, to which none of these statutes apply. C. ¶ 17 We also decline to hold that liability-limitation clauses are generally unenforceable as contrary to a judicially identified public policy. Such clauses may desirably allow the parties to allocate as between themselves the risks of damages in excess of the agreed-upon cap, which could preserve incentives for one party to take due care while assigning the risk of greater damages to another party that might be better able to mitigate or insure against them. 383, 694 P.2d at 213. See SRP, 143 Ariz. at To the extent that such clauses may undesirably reflect the result of coercion or otherwise improper bargaining, other contractual doctrines, such as those specifying conditions for effective consent, serve to protect against their enforcement in particular cases. Moreover, we have previously held that clauses waiving certain tort liability entirely, rather than merely capping negligence, may be enforceable. (discussing conditions for prospective damages for See id. at 385, 694 P.2d at 215 enforceability certain tort claims). 9 of clause waiving ¶ 18 Ocotillo relies on two cases from other jurisdictions. First, Ocotillo argues that we should follow City of Dillingham v. CH2M Hill Northwest Inc., 873 P.2d 1271 (Alaska 1994), which held a liability limitation invalid as against the public policy of Alaska. That decision was largely premised upon the Alaska legislature s express liability-limitation rejection provisions indemnification statute. of a when it Id. at 1276-78. proposal enacted to exempt its anti- There is no similar legislative history for A.R.S. § 32-1159. Rather than presume that our legislature implicitly intended to proscribe liabilitylimitation specified provisions, those we instead contractual believe terms it the meant legislature to declare unenforceable. ¶ 19 Second, Ocotillo relies on Lanier at McEver, L.P. v. Planners & Engineers Collaborative, Inc., 663 S.E.2d 240 (Ga. 2008). The contractual provision at issue there provided that a construction developer agreed to limit the liability of [an engineering firm] and its sub-consultants to [the construction developer] and to all construction contractors and subcontractors on the project or any third parties . . . so that the total aggregate liability of [the engineering firm] and its subconsultants . . . shall not exceed [the] total fee for services rendered. Id. at 241 (emphasis added). The court construed this clause as an indemnification, which the court then invalidated under Georgia s anti-indemnification statute. 10 Id. at 242-43. The court concluded that the provision would completely immunize the engineering firm from liability to third parties after the firm paid out an amount equal to its fee. Id. at 243-44. Although a third party could still sue the engineering firm, the firm would be entitled to reimbursement construction developer for any losses. ¶ 20 from the Id. Lanier is not helpful to Ocotillo. The Lanier court itself distinguished the Ocotillo/WLB provision because it is devoid of any reference to liability for third-party claims brought by the general public. Id. at 243 n.4 (citing 1800 Ocotillo, LLC v. WLB Group, Inc., 217 Ariz. 465, 176 P.3d 33 (App. 2008)). here is not Thus, the Lanier court concluded that the clause an indemnity clause, as do we. Lanier also distinguished, and apparently approved, the liability-limiting clause in Valhal, which is virtually identical to the provision at issue here. ¶ 21 Id. at 243 & n.3. In sum, we do not believe that liability-limitation clauses like the one at issue here are unenforceable as contrary to an identifiable public policy that clearly outweighs any interests in their enforcement. II. ¶ 22 We next address whether the liability-limitation clause constitutes an assumption of risk subject to Article 18, Section 5 of the Arizona 11 Constitution. This section provides: The defense of contributory negligence or of assumption of risk shall, in all cases whatsoever, be a question of fact and shall, at all times, be left to the jury. ¶ 23 Because the constitution does not define the phrase assumption of risk, we must first consider what the phrase generally meant at the time of our constitutional convention and the purposes animating the delegates when they included Article 18, Section 5 in the proposed constitution. At common law, the doctrine of assumption of risk served as an absolute bar to a plaintiff s recovery. Delegates to the convention were particularly concerned that courts had used the unholy trinity of assumption of risk, contributory negligence, and the fellowservant rule to bar recovery by injured employees against their employers. Noel Fidel, Preeminently a Political Institution: The Right of Arizona Juries to Nullify the Law of Contributory Negligence, 23 Ariz. St. L.J. 1, 10-12 (1991). ¶ 24 After considering and rejecting a proposal to simply abolish the defense of assumption of risk, the delegates instead decided to mitigate its harsh effects by providing in Article 18, Section 5 that the defense will be both a question of fact and reserved to the jury in all cases whatsoever. See Schwab v. Matley, 164 Ariz. 421, 424, 793 P.2d 1088, 1091 (1990); Hall v. A.N.R. Freight Sys. Inc., 149 Ariz. 130, 133, 717 P.2d 434, 437 (1986). The delegates also 12 reserved to the jury the determination of the defense of contributory negligence and both abolished the agreements that liability. ¶ 25 fellow-servant released rule or and prohibited discharged certain employers from Ariz. Const. art. 18, §§ 3-5. This background suggests that Article 18, Section 5 was intended to address assumption of risk in the sense of a defense that effectively relieved a defendant of any duty of care by completely barring recovery by the injured party. For example, in Schwab, 164 Ariz. at 424, 793 P.2d at 1091, we noted that [a]ssumption of the risk as a defense . . . always rest[ed] upon the idea that the defendant [was] relieved of any duty toward the plaintiff. The very basis of the doctrine was that the plaintiff had expressly or impliedly consented to the defendant s negligent conduct, the legal result [being] that the defendant is simply relieved of the duty which would otherwise exist. Id. (emphasis added)(citations omitted)(quoting W. Page Keeton, et al., Prosser and Keeton on the Law of Torts § 65, at 451, § 68, at 481 (5th ed. 1984)). ¶ 26 in The phrase assumption of risk has admittedly evolved the nearly constitution. 406 ¶ 14, doctrine several of one hundred years since the adoption of our Cf. Phelps v. Firebird Raceway, 210 Ariz. 403, 111 P.3d 1003, assumption different of senses). 1006 risk (2005) has Although 13 been (observing used Article by 18, that the courts in Section 5 provides that a jury shall determine whether this defense applies in particular cases, the constitution also allows the legislature to further limit its application by, for example, providing that it would be subsumed under comparative principles that reduce rather than deny recovery. fault See Gunnell v. Ariz. Pub. Serv. Co., 202 Ariz. 388, 394 ¶¶ 22-23, 46 P.3d 399, 406 (2002). Similarly, some commentators have described assumption of risk more broadly to include not only the common law s complete defense to recovery but also liability-limitation clauses. See, e.g., Restatement (Third) of Torts: Apportionment of Liability § 2 cmt. a (2000); Restatement (Second) of Torts § 496(B) cmt. h (1965); Keeton, et al., supra, § 68, at 482-83. ¶ 27 We most recently construed Article 18, Section 5 in Phelps, which held that the constitutional provision applies to express assumptions of risk. In that case, a racecar driver agreed with a racetrack to voluntarily accept the risks and to RELEASE[], WAIVE[], DISCHARGE[] AND COVENANT[] NOT TO SUE [the racetrack] . . . FOR ALL LOSS OR DAMAGE he sustained WHETHER CAUSED BY THE NEGLIGENCE OF THE [racetrack] Phelps, 210 Ariz. at 404 ¶ 2, 111 P.3d at 1004. OR OTHERWISE. In holding that this provision (which was titled assumption of risk in the contract) was subject to Article 18, Section 5, we observed that such agreements have long been classified as assumption of risk and that the doctrine includes different forms of the 14 defense without regard to whether the agreement was express or implied. Id. at 405-06 ¶¶ 7-11, 14, 111 P.3d at 1005-06. ¶ 28 Phelps did not, however, address the issue presented here: whether a liability-limitation clause is an assumption of risk defense subject to Article 18, Section 5. Consistent with the background to this constitutional provision, Phelps focused on assumption of risk in the sense of a defense that would have completely barred any recovery there an exculpatory clause relieving the racetrack of any liability. To be sure, Phelps referred in passing to the contractual provisions in involving assumption of risk. at 1013. Ariz. as See id. at 413 ¶ 41, 111 P.3d But the provisions in SRP involved both a complete waiver of certain claims and a liability limitation. 143 SRP at 373, 694 P.2d at 203. Moreover, See SRP, SRP itself distinguished disclaimers of liability that relieve a party of any duty of care - which have the same effect as the common law doctrine of assumption of risk - from agreements that limit tort remedies. Id. at 385, 694 P.2d at 215. much decide, less whether a SRP did not discuss, liability-limitation subject to Article 18, Section 5. clause is Thus, neither SRP nor Phelps resolves the question before us. ¶ 29 There are good reasons to interpret assumption of risk as used in Article 18, Section 5 to refer only to defenses that effectively relieve the defendant of any duty. 15 It was the harsh consequence of such a defense that caused the framers to reserve its determination to the jury. implicated by agreements eliminate liability. that This concern is not reasonably limit rather than Moreover, the benefits of such agreements in allowing parties to prospectively allocate potential losses in excess of enforceability (noting cap would be in every case turned determinations. 406 the largely on lost if their after-the-fact jury See Gunnell, 202 Ariz. at 394 ¶ 23, 46 P.3d at that Article 18, Section 5 precludes summary judgment or directed verdict on issue of assumption of risk). ¶ 30 We conclude that liability-limitation provisions generally are not a form of assumption of risk within the meaning of Article 18, Section 5. When such provisions do not effectively relieve a party from a duty to exercise due care, but instead merely place a ceiling on recoverable damages, they do not operate like the common law defense of assumption of risk. Construing Article 18, Section 5 to include such provisions would not comport with either the common meaning of the phrase constitutional assumption of convention or risk with at the the purpose time of animating the the framers. ¶ 31 We note that the WLB/Ocotillo liability-limitation provision does not purport to relieve WLB of all liability nor does it have that effect. It does not abrogate WLB s duty 16 toward Ocotillo, but instead limits the recoverable damages if the duty is breached. This clause is not an assumption of risk within the meaning of Article 18, Section 5. III. ¶ 32 Ocotillo finally argues that even if liability- limitation clauses generally are not contrary to public policy or subject to Article 18, Section 5, the clause in its contract should not be enforced. In this regard, Ocotillo contends that the liability limitation was not freely and knowingly negotiated between the parties as required by SRP or it was contrary to Ocotillo s reasonable established in expectations Darner Motor under Sales, the doctrine v. Universal Inc. Underwriters Insurance Co., 140 Ariz. 383, 391-92, 682 P.2d 388, 396-97 (1984). Ocotillo maintains that, at the least, material facts are disputed regarding the clause s enforceability. WLB counters by arguing that the SRP standard for enforcing a waiver clause should inapplicable. not apply or was met and that Darner is Rather than address these arguments in the first instance, we leave them to the court of appeals to consider on remand. Cf. First Am. Title Ins. Co. v. Action Acquisitions, LLC, Ariz. __ (declining to __, __, decide ¶ 32, 187 application P.3d of 1107, reasonable doctrine in case involving business entities). 17 1113-14 (2008) expectations IV. ¶ 33 We conclude that the liability-limitation clause in the WLB/Ocotillo contract is neither contrary to public policy nor subject Constitution. to Article 18, Section 5 of the Arizona Accordingly, we vacate the opinion of the court of appeals and remand this case so that court may consider any other properly preserved arguments by the parties concerning the appropriateness of the trial court s entry of partial summary judgment enforcing the clause. _______________________________________ W. Scott Bales, Justice CONCURRING: _______________________________________ Ruth V. McGregor, Chief Justice _______________________________________ Rebecca White Berch, Vice Chief Justice _______________________________________ Michael D. Ryan, Justice _______________________________________ Andrew D. Hurwitz, Justice 18

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