1800 OCOTILLO, LLC v. WLB Group, Inc.

SUPREME COURT OF ARIZONA
En Banc

1800 OCOTILLO, LLC, an Arizona ) Arizona Supreme Court
limited liability company, ) No. CV-08-0057-PR
)
Plaintiff/Appellant, ) Court of Appeals
) Division One
v. ) No. 1 CA-CV 07-0037
)
THE WLB GROUP, INC., an Arizona ) Maricopa County
corporation, ) Superior Court
) No. CV2000-021738
Defendant/Appellee. )
)
)
) 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. Phoenix
By Dow Glenn Ostlund
Tracy S. Morehouse
Kevin P. Nelson
Attorneys for 1800 Ocotillo, LLC

BONNETT, FAIRBOURN, FRIEDMAN & BALINT, P.C. Phoenix
By Jerry C. Bonnett
Meredith L. Vivona
Attorneys for the WLB Group, Inc.

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”), 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

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 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.

¶5 The 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

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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. 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. See 15 Grace

McLane Giesel, Corbin on Contracts § 79.3, at 18 (rev. ed. 2003)

(“[C]ourts generally have acted cautiously in declaring a

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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. 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. See Restatement

(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:

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 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 also A.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

Dictionary 749, 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. See 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

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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. See id. 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. 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

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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 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 argues that these statues evidence the

legislature’s intent to preclude professionals from limiting

their liability through contract. 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 or formation of a

8 
limited liability company. Section 29-1025(A) simply recognizes

that a partnership is liable for the acts of the partners. WLB

is not a professional corporation, a professional limited

liability company, or a partnership. It is a 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. See SRP, 143 Ariz. at

383, 694 P.2d at 213. 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 prospective damages for

negligence, may be enforceable. See id. at 385, 694 P.2d at 215

(discussing conditions for enforceability of clause waiving

certain tort claims).

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¶ 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 rejection of a proposal to exempt

liability-limitation provisions when it enacted its anti-

indemnification statute. Id. at 1276-78. There is no similar

legislative history for A.R.S. § 32-1159. Rather than presume

that our legislature implicitly intended to proscribe liability-

limitation provisions, we instead believe the legislature

specified those contractual terms it meant 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. Id. at 242-43. The

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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 from the

construction developer for any losses. Id.

¶20 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)). Thus, the Lanier court concluded that the clause

here is not 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. Id. at 243 & n.3.

¶21 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 Constitution. This section

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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 fellow-

servant 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 reserved to the jury the

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determination of the defense of contributory negligence and both

abolished the fellow-servant rule and prohibited certain

agreements that “released or discharged” employers from

liability. Ariz. Const. art. 18, §§ 3-5.

¶25 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 The phrase “assumption of risk” has admittedly evolved

in the nearly one hundred years since the adoption of our

constitution. Cf. Phelps v. Firebird Raceway, 210 Ariz. 403,

406 ¶ 14, 111 P.3d 1003, 1006 (2005) (observing that the

doctrine of assumption of risk has been used by courts in

several different senses). Although Article 18, Section 5

13 
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 fault

principles that reduce rather than deny recovery. 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] OR OTHERWISE.”

Phelps, 210 Ariz. at 404 ¶ 2, 111 P.3d at 1004. 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 SRP as

involving “assumption of risk.” See id. at 413 ¶ 41, 111 P.3d

at 1013. But the provisions in SRP involved both a complete

waiver of certain claims and a liability limitation. See SRP,

143 Ariz. at 373, 694 P.2d at 203. Moreover, 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. SRP did not discuss,

much less decide, whether a liability-limitation clause is

subject to Article 18, Section 5. 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. It was the

15 
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. Moreover, the benefits of such agreements

in allowing parties to prospectively allocate potential losses

in excess of the cap would be largely lost if their

enforceability turned in every case on after-the-fact jury

determinations. See Gunnell, 202 Ariz. at 394 ¶ 23, 46 P.3d at

406 (noting 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 “assumption of risk” at the time of the

constitutional convention or with the purpose animating 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 expectations under the doctrine

established in Darner Motor Sales, Inc. v. Universal

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 not apply or was met and that Darner is

inapplicable. 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. __, __, ¶ 32, 187 P.3d 1107, 1113-14 (2008)

(declining to decide application of reasonable expectations

doctrine in case involving business entities).

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 IV.

¶33 We conclude that the liability-limitation clause in

the WLB/Ocotillo contract is neither contrary to public policy

nor subject to Article 18, Section 5 of the Arizona

Constitution. 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

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