Ruling: Contracts limiting liability OK

A provision in a contract limiting one party's financial liability in cases of malpractice is not unconstitutional, the Arizona Supreme Court has ruled.

The justices rejected arguments by the other party to the contract that the question of liability must always be left to a jury. They also turned aside contentions that those kinds of contractual provisions are contrary to public policy and therefore unenforceable.

In essence, the high court said as long as a contract does not eliminate one party's liability, or limit it to an amount so small as to be meaningless, it is valid in Arizona.

Central to the lawsuit is a contract that The WLB Group entered into with a limited liability company called 1800 Ocotillo. WLB had planned to build townhomes near a canal.

One of WLB's duties was to prepare a survey identifying boundary lines and rights of way.

After the survey was completed, the canal operator claimed an interest in a right of way that apparently was not accurately reflected in the WLB report. That complaint resulted in Phoenix denying Ocotillo certain building permits.

Ocotillo sued WLB, claiming the firm's negligence had caused delays and increased costs. WLB, in its response, cited a provision in the contract which stated that its liability is limited to the fees it collected, a figure less than the damages Ocotillo was seeking.

The trial judge agreed with WLB, limiting its liability to the $14,242 in fees.

Supreme Court Justice Scott Bales wrote for the court that just because a provision is in a contract does not make it legal.

He said they can be voided if they violate either state law or "other identifiable public policy." The analysis of that latter issue, Bales wrote, "generally focuses on the extent to which enforcement of the term would be injurious to the public welfare."

But Bales said that judges generally are hesitant to void contracts on public policy grounds.

"Our law generally presumes, especially in commercial contexts, that private parties are best able to determine if particular contractual terms serve their interests," he said.

In this case, Bales said, the public policy issue is whether a limit of liability takes away a party's interest in exercising due care. But the judge noted that the contract does not eliminate liability but limits it.

"Under the Ocotillo contract, WLB remains liable for the fees it earns," he said. "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."

The other legal arguments pertain to a constitutional provision which says, "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."

The concept of "assumption of risk" is that the plaintiff, in this case Ocotillo, assumed some of the risk that the survey would be wrong by agreeing to sign a contract that limited WLB's liability.

Bales said that language appears to have been put into the Arizona Constitution because the framers did not want defendants in civil cases to be able to escape without any liability at all for their actions. He said the provision does not apply to situations like this, where the liability is limited, but not extinguished entirely.