Caveat Emptor
Limiting Damage Recoveries In Malpractice
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By: Dow Glenn Ostlund
In an Opinion published in November of 2008, the Arizona Supreme Court gave licensed professionals in Arizona the green light to limit their liability for damages to their clients for acts of malpractice to only fees paid.
A first time developer of a small townhome project in Phoenix (1800), negotiated with an engineering and surveying firm (WLB) for professional services.WLB said nothing to 1800 about wanting to limit its liability to 1800 in the event its work proved to be negligent and caused 1800 damage.Nor did WLB attach a copy of its "standard conditions" page to any of the drafts of the contract being negotiated between the parties.
But WLB did attach a standard conditions page to the final contract and faxed the contract, along with the smaller print standard conditions page to 1800, who signed the contract and initialed the largely illegible standard conditions page. Paragraph 7 of the standard conditions said:
Client agrees that the liability of WLB, its agents and employees, in connection with services hereunder to the client and to all persons having contractual relations 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 hereunder.
WLB's work turned out to be defective and stopped the project dead in its tracks.This resulted in significant cost increases to the project and major damages to 1800.
1800 sued WLB for malpractice.WLB claimed that its liability to 1800, assuming malpractice was proven, was limited by paragraph 7 of the standard conditions to only the fees 1800 had paid WLB—less than 1% of the expected damages.1800 argued to the Arizona Supreme Court that the restriction was contrary to Arizona's longstanding public policy preventing professionals from limiting their liability for their own malpractice which causes damages to their clients.
The Supreme Court sided with WLB, ruling that there is no legal reason to treat licensed professionals differently than other types of people who are free to contract for a limitation (as opposed to a total elimination) of damages they may cause others to a contract as a result of their negligently performing their side of the contract.
The Court's only expressed warning about contractual limitation of liability provisions was that the provision must satisfy traditional contract formation requirements.The Court also observed that a professional association may declare such limitations of liability provisions "unethical," and thereby prevent their use by members of that professional group.
However, ethical standards may change.A few years ago, it was "unethical" for medical and legal professionals to advertise.One enterprising attorney changed all of that by persuading the United States Supreme Court that if it is not illegal, it is not unethical, and the advertising world has never been the same since.
In light of the ruling in the WLB1800 case, the following should be carefully examined and considered:
If you are negotiating with and/or obtaining the services of a licensed professional (or in any contract for that matter), READ THE CONTRACT—INCLUDING THE BOILERPLATE—VERY CAREFULLY AND UNDERSTAND THE MEANING OF YOUR AGREEMENT.
If you are providing work and/or services and/or product to someone else pursuant to a written contract, even if you are a licensed professional, be aware that it is not illegal, against public policy, or legally improper for you to try to limit your liability for damages to the other party to the contract resulting from your own malpractice.
