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1800 Ocotillo, LLC v. The WLB Group, Inc. - 11/3/2008

Arizona Supreme Court Holds Liability-Limitation Clauses Do Not Violate Public Policy, and Do Not Require Submission To A Jury As An Assumption of Risk Defense.

The WLB Group, Inc. (“WLB”) contracted with 1800 Ocotillo, LLC (“Ocotillo”) to provide surveying services for Ocotillo’s construction project.  A flaw in WLB’s survey resulted in additional costs to Ocotillo, so Ocotillo sued WLB for damages.  However, the contract limited WLB’s liability to the amount Ocotillo paid for its services.  The trial court held the clause did not violate public policy.  The Court of Appeals agreed, but held the clause was an assumption of risk defense, and therefore a jury must decide its enforceability.  WLB petitioned the Supreme Court for review of the assumption of risk issue, and Ocotillo cross-petitioned for review of the public policy issue.

To demonstrate a public policy against liability-limitation clauses, Ocotillo relied on A.R.S. § 32-1159, which states that indemnity clauses in construction contracts are against public policy.  However, the Supreme Court noted that indemnity clauses are distinguishable from liability limitations, because the former remove all incentive for a party to exercise due care, whereas the latter do not.

Ocotillo also relied on various laws that retain personal liability for members of professional corporations, limited liability companies, and partnerships.  The Court explained that these laws are irrelevant to the issue of limiting liability by contract, and that WLB is a traditional corporation, for which none of the cited statutes applied.  The Court also rejected Ocotillo’s argument that liability-limitation clauses are contrary to judicially created public policy.  The Court held the liability-limitation clause was not unenforceable for being against public policy.

With respect to the second issue, the Arizona Constitution states that “[t]he defense of … assumption of risk shall, in all cases whatsoever … be left to the jury.”  Ariz. Const. art XVIII, § 5.  The Court explained that the drafters of the Constitution intended this section to apply to defenses that would operate as a complete bar to a plaintiff’s recovery, which a liability-limitation clause does not.  Therefore, the Court vacated the opinion of the court of appeals on this issue, and remanded the case for further proceedings.

Justice Bales authored the opinion, Chief Justice McGregor, Vice Chief Justice Berch, and Justices Ryan and Hurwitz concurred.



Posted On: 11/12/2008