A real estate developer (Ocotillo), commenced development of a townhouse project in Phoenix, AZ on a parcel of property bounded on one side by the Arizona Canal.  Ocotillo hired a surveying firm (WLB).  The contract between Ocotillo and WLB contained a provision limiting WLB's liability for negligence to fees actually paid to WLB under the contract which amounted to $14,242.  The contract language read as follows: 

Client agrees that the liability of WLB . . . resulting from any negligent acts, errors and/or omissions of WLB . . .  is limited to the total fees actually paid by the client to WLB for services rendered. 

WLB surveyed the property and although the survey accurately showed the property boundaries, the surveyor failed to demarcate the right-of-way owned by the Arizona Canal.  WLB prepared both the improvement drawings and the final plat on the basis of its erroneous survey.  The Arizona Canal contested the final plat and the City of Phoenix refused to issue construction permits for the project.  Once the right‑of‑way was properly depicted, Ocotillo had to hire additional engineering and survey firms to redesign the site layout and property improvement to obtain construction permits for the project. 

The developer sued the surveyor for breach of contract and professional negligence.  Before the trial, the surveyor asked that the court declare, as a matter of law, that the LOL provision in its contract was enforceable to cap its liability.  The court held that the LOL clause was valid and ruled any damages due the developer for professional negligence would be limited to the amount Ocotillo actually paid to WLB under its contract with WLB.

The developer appealed the ruling to the Arizona Court of Appeals, contending that the LOL provision was contrary to Arizona's anti-indemnification statute which prohibits parties from shielding themselves from liability for negligence that is wholly theirs.  The court found that the LOL provisions merely capped the amount of liability and do not exonerate the offending party from liability and, therefore, are valid and enforceable.  In its ruling, however, the court did further hold that a jury must decide the issue of the enforceability of an LOL provision since the Arizona constitution states that any defense by a party concerning "its assumption of risk" is a question of fact that should in all cases be decided by a jury.  The court found this argument persuasive and remanded the case to a lower court so that a jury could decide the issue. 

The benefit of a LOL clause is not just that it caps liability, it also allows the design professional to avoid proceeding in a lawsuit by tendering the amount of the cap to the plaintiff.  The Arizona decision was very costly to the surveyor, since it made it impossible for the survey firm to avoid a jury trial.  Even if the jury ultimately decides now to enforce the clause and cap the surveyor's liability at $14,242, the legal fees incurred by the surveyor or its insurance carrier to achieve that outcome, may well dwarf that amount.   1800 Ocotillo v. WLB Group, 217 Ariz. 465, 176 P. 3d 33 (2008)

The disputes arose from contract drawings which showed a set of steam prevacuum sterilizers enclosed within walls depicted by unlabeled double lines.  One drawing, that of equipment and furniture, had unlabeled double lines on both sides of, and enclosing, two sets of two vacuum steam sterilizer equipment.  Another drawing, the interior elevation plan, did not include any wall designations.  Dick Pacific took the position that the unlabeled double lines represented a wall or item of equipment that was to be supplied and installed by a follow-on contractor.  The technical specifications, however, called for stainless steel modular walls encasing the prevacuumed sterilizers.

Dick Pacific submitted a request for information to obtain the designation of the wall type.  The Corps responded that the technical specifications provided sufficient information and that no increase in the contract or time was justified for modular walls.  Dick Pacific submitted a proposed change order for stainless steel walls and indicated it would not proceed with the work unless directed.  The Corps. took the position that the modular walls did not constitute a change to the contract.  Dick Pacific, through its contractor ISEC, completed the walls and submitted a change order request for $99,479 for the construction and delay costs.  The Corps. denied Dick Pacific's request and the matter was appealed to the Armed Services Board of Contract Appeals (ASBCA).

One of Dick Pacific's arguments on appeal was that the Contract Documents were subject to more than one reasonable one interpretation, thus, the contract was ambiguous.  It reasoned that any contract ambiguity should trigger the order of precedence clause, which expressly stated that the contract drawings governed over the technical specifications.  The technical specifications were last in order of importance in the order of precedence clause.  The Corps. countered by arguing that despite the omission of a wall labeled in the drawings, the contract specifications and drawings read as a whole clearly required modular walls.  It contended that even if there were an ambiguity, Dick Pacific had a duty to make an inquiry or seek bid clarification.

The ASBCA found that the specifications and drawings reasonably read, as a whole, required modular walls for the sterilizers.  It relied primarily on several sections of the technical specifications that designated both sterilizers and modular walls as contractor installed equipment, defined the fabrication requirements for the walls and cited the wall layout on the drawings.  Although the drawings failed to show what type of wall was to be installed, the Board found that the depiction of the sterilizers on the drawings made it reasonably clear that modular walls were required in those locations.  The Board found no ambiguity in the contract.

This case provides important guidance to the industry on what is often a confusing issue.  Some parties think that an order of precedence clause creates an automatic solution to a contract interpretation dispute.  That is however not the case.  First the contractor must demonstrate that the contract documents are contradictory before it can resort to the order of precedents clause.  In this instance, the ASBCA found that the contract documents interpreted together, were not ambiguous and therefore, did not resort to the order of presence clause.

Dick Pacific/GHEMM JV, ASBCA No. 55806, 2007 WL 3265023

One of the more significant facts in the case was that Rudd conceded that the contract was formed between Rudd and Tacoma Fixture when Tacoma Fixture would make telephone calls to Rudd to order products and Rudd would agree to deliver the products.  Because of this concession, the Court analyzed whether the terms contained in Rudd's invoices were additional terms, rather than original terms of the parties' contract.

The Court analyzed the issue in the case under RCW 62A.2-207, which addresses when additional terms become a part of the parties' agreement under the UCC.  That section provides as follows:

(1)        A definite and seasonable expression of acceptance or a written confirmation which is sent within a reasonable time operates as an acceptance even though it states terms additional to or different from those offered or agreed upon, unless acceptance is expressly made conditional on assent to the additional or different terms.

(2)       Additional terms are to be construed as proposals for addition of a contract. Between merchants such terms become a part of the contract, unless: (a) the offer expressly limits acceptance to the terms of the offer; (b) they materially alter it; or (c) notification of objection to them has already been given or is given within a reasonable time after notice of them is received.

(3)      Conduct by both parties, which recognizes the existence of a contract is sufficient to establish a contract for sale although the writings of the parties do not otherwise establish a contract. In such case, the terms of the particular contract consist of those terms on which the writings of the parties agree, together with any supplementary terms incorporated under any other provision of this Title.

The Court found that part 1 did not apply because:  first, the terms on the invoice were additional terms construed as proposals that Rudd conceded were not accepted by Tacoma Fixture; and (2) acceptance by Rudd was not made expressly conditional on Tacoma Fixture's acceptance of the additional terms.

The Court held that part 2 of the statute did not apply because it was a contract between merchants and the additional terms (warranty disclaimer, remedy limitation, and form selection clause) materially altered the contract.

Therefore, the Court held that part 3 of the statute applied and that the terms of the parties' agreement were governed by their oral agreement and the supplemental terms provided by the UCC.  The additional terms that Rudd relied on as a basis for its summary judgment motion did not form a part of the parties' agreement, and the Court of Appeals affirmed the trial court's denial of Rudd's motion for summary judgment.