Court confirms liability limit by contract

The Missouri Supreme Court on Nov. 20 handed down a decision that businesses should be aware of. The case, Purcell Tire & Rubber Company Inc. versus Executive Beechcraft, suggests that corporations may be able to limit their liability when negotiating a contract.

The facts of the case are straightforward. Purcell Tire entered into a contract with Executive Beechcraft Inc. to have a light, twin-engine turbo jet inspected prior to an anticipated purchase. The airplane was a used Beechcraft 400. Beech-craft faxed a three-page agreement to Purcell Tire to sign before making the inspection.

The most important provision for the court was a paragraph inserted directly above the signature line for Purcell Tire. That paragraph read as follows:

"It is expressly agreed that the liability, if any, of Executive Beechcraft Inc. under this agreement shall be limited to the cost of the services performed hereunder. All parties to this agreement expressly agree to indemnify and hold harmless Executive Beechcraft Inc. from any damage or expenses claimed by any party to this agreement beyond the cost of the services performed hereunder."

The cost of the inspection for a twin-engine turbo jet was $1,250. The provision would thus purport to limit Execu-tive Beechcraft's liability for negligence in the inspection to the amount paid for the service.

Purcell Tire signed the contract and faxed it back without alteration. Beech-craft subsequently inspected the airplane and made a report to the company. Purcell Tire then bought the airplane for slightly more than $2 million.

Purcell's mechanics later discovered an oil leak which worsened. Beechcraft's report did not mention the leak. Even-tually the engine was repaired, and Purcell sought damages of approximately $370,000 for breach of contract and negligence.

Beechcraft admitted liability, but only to the extent of the $1,250 paid for the inspection. The trial and appellate courts both found for Beechcraft, limiting the company's liability to $1,250.

On appeal to the Missouri Supreme Court, the court noted that in this case, both parties are sophisticated businesses negotiating at arm's length. Purcell Tire was one of the largest tire chains, and its president had purchased about 15 planes. Sophisticated parties have the right, the court stated, to enter into contracts, even if they fail to make a good business deal.

Nor would the court find the language either ambiguous or unconscionable so as to void the liability limit. The language, while not expressly stating that Purcell was waiving any negligence by Beechcraft, was deemed clear, unambiguous and unmistakable, being located right above the signature line.

The court found that the liability limit was enforceable and that Beechcraft could not be responsible for more than $1,250 in damages.

While the court was willing to limit economic damages, it is clear from this and other Missouri cases that it is far more difficult for a party to limit its liability for negligence that results in personal injury.

Nonetheless, companies should examine carefully damage limitation clauses in their business contracts.

(Stephen F. Aton is a Springfield attorney practicing in the areas of corporate law and taxation, and estate planning.)