Arizona Court Enforces Limitation of Damages Provision in Engineering Agreement

1800 Ocotillo, LLC v. WLB Group, Inc.
2008 Ariz. App. LEXIS 9 (Jan. 29, 2008)

The Court of Appeals of Arizona held that a state statute prohibiting design professionals for contracting for indemnity for their sole negligence does not as matter of law prohibit the use of limitation of damages provisions in professional service contracts.

In 1998, a real estate developer, 1800 Ocotillo, undertook the development of a townhouse project in Phoenix that bordered the Arizona Canal. Developer hired an engineering-architectural firm, The WLB Group, to perform surveying, engineering and landscape architecture services on the project. Developer had its design-build contractor sign the contract with the engineering-architectural firm, which included a limitation of damages provision limiting its exposure to the amount of its fees. While the parties never specifically discussed this provision, the entire contract was incorporated into a supplemental contract between the Developer and the engineering architectural firm approximately two years later.

The engineering-architectural firm improperly performed a survey by failing to accurately identify existing right-of-ways. Thereafter, the firm prepared improvement drawings based on the erroneous survey. The ultimate impact was that the City of Phoenix refused to issue construction permits and required a redesigned. Developer sued engineering-architectural firm for breach of contract and professional negligence. The engineering-architectural firm counterclaimed alleging unpaid fees and sought a declaratory judgment regarding the enforceability of the contract’s limitation of damages provisions.

The trial court trial, on motion for summary judgment, declared the limitation of liability provision enforceable, capping damages at the fees actually paid. Developer appealed, arguing that these types of provisions in professional service contracts are void as a matter of law against Arizona public policy. In support this argument, Developer relied upon Arizona statutes rendering shareholders of professional corporations personally and fully liable for negligence while rendering professional services and prohibiting professionals from contracting for indemnity against their sole negligence.

On appeal, the Court held that these statutes did not, as a matter of law, bar the use of limitation of damages provisions in professional service contracts, while noting a split of authority decisions in other jurisdictions on the implication of anti-indemnity statutes on the enforceability of such provisions. However, the Court did agree with the Developer that under an Arizona statute requiring the enforceability of assumption of risk provisions to be submitted to the jury as a question of fact, the matter would have to be remanded to the trial court for resolution by a jury.

Note: In 1800 Ocotillo, LLC v. WLB Group, Inc., 196 P.3d 222, 2008 Ariz. LEXIS 203 (Ariz. 2008), the Arizona Supreme Court affirmed the ruling that the limitation of damages provision was enforceable, but disagreed that it was subject to the statute pertaining to assumption of risk which would have further required the issue of its enforceability to be submitted to the jury as a question of fact.

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