Court enforces limitation-of-liability provision.

The Oregon Court of Appeals upheld the validity of limitation-of-liability provisions in a contract for professional services. Although this case involved an engineer, its rationale could be applied to an accountant's service contract.

The case began when plaintiff Richard C. Estey contracted with MacKenzie Engineering Inc. (MEI) to conduct a "limited visual review" of a house Estey intended to purchase. The one-page service contract set out the estimated contract sum of $200 and contained this clause: "The liability of MEI and the liability of its employees are limited to the contract sum."

Estey subsequently purchased the house and later discovered numerous defects. He sued the engineering firm for negligence, negligent misrepresentation and breach of contract in the performance of professional services and alleged $340,000 in damages.

MEI filed a motion for summary judgment, which the trial court granted.

Estey appealed, and the appellate court ruled for the defendant (MEI) noting, however, that limitations of liability--while not automatically void--were not favored by courts, and conceding that the parties did not specifically bargain for the clause involved in this case. Nevertheless, the appellate court upheld the limitation because it was sufficiently conspicuous, did not involve an essential public service and its enforcement was not contrary to a strong public policy.

The court further noted that this was not a contract of adhesion, that is, there was no indication that the parties had unequal bargaining power or that the plaintiff had no alternative to hiring MEI. Estey also had argued that he was a homeowner and not a sophisticated business and, therefore, the transaction was inherently unequal. However, the court said it would enforce such limitations.

This is an important case for all professionals. The law on enforcement of limitation-of-liability clauses varies from state to state. Accountants should consult their legal advisers about the enforceability of liability clauses in their engagement letters. If acceptable in a particular jurisdiction, such clauses can be an excellent risk management tool in deterring frivolous and exaggerated claims. (Estey v. MacKenzie Engineering Inc., 902 P.2d 1220, Or. App. 1995)

-Edited by Wayne Baliga, CPA, JD, CPCU, CFE, president of Aon Technical Insurance Services.